The Balance Sheet Explained: What It Reveals About Your Organizations Health

 

The Balance Sheet Explained: What It Reveals About Your NFP’s Health

What is the Balance Sheet and What is it Trying to Tell Us? 

The Balance Sheet (also known as Statement of Financial Position) simply shows what the organisations owns (assets) and what it owes (liabilities) and the difference between these two is the net assets (equity).  

The Balance Sheet highlights how financially stable your organization is at a point in time. 

Key Terms to Understand

The table below breaks down some key terms required to understand what makes up a Balance Sheet. 

Category	Meaning	Examples
Current Assets	Things the organisation owns that can be turned into cash within 12 months	Cash, money owed to you (debtors), stock, short-term investments
Non-Current Assets	Things the organisation owns that will be used for more than 12 months	Buildings, vehicles, equipment, long-term investments
Current Liabilities	Amounts the organisation owes that must be paid within 12 months	Bills, wages payable, short-term loans, grants received in advance
Non-Current Liabilities	Amounts owed that will be paid off over more than 12 months	Long-term loans, leases, long-term provisions
Equity	Equity is simply what’s left over after you take everything the organisation owns (assets)  and subtract everything it owes (liabilities).

Limitation of a Balance Sheet

The main limitations of a Balance Sheet are: 

• Snapshot only: Shows financial position at one point in time, not ongoing changes.

• Historical cost: Assets recorded at purchase price or estimates, not current market value.

• Incomplete picture:  Intangibles and off‑balance sheet items often excluded (examples: customer loyalty, reputation, specific skills). 

As stated throughout the blog series, each financial statement is useful, but incomplete. The Balance Sheet needs to be interpreted alongside the profit and loss and cash flow statement. An organisation might look strong on paper with large assets and low liabilities, however, they might be struggling with profitability (profit and loss) (i.e. historically they have obtained assets, but income in recent years might be low). 

Close to Home Example of a Balance Sheet:

Sometimes the best way to understand financial reports is to relate them to everyday life. 

We met The Jones family in the blog on profit and loss statements. Just a quick reminder that The Jones family consists of two adults and three children. Their household income comes from two salaries, supplemented by modest dividends from share investments and they have a mortgage on their home. 

Item	Amount
Assets
Current Assets		Total Assets: Everything that the family owns/has with it's control		Current Assets: Cash and other assets which can be converted into cash in the next 12 months
Checking Account	$9,500
Shares (liquid investments)	$15,000
Total Current Assets	$24,500
Non Current Assets				Non Current Assets: Assets which are not expected to be converted into cash within the next 12 months
Retirement Accounts (401k, IRA/Super)	$50,000
Home (Market Value)	$1,200,000
Car (Market Value)	$30,000
Total Non-Current Assets	$1,280,000
Total Assets	$1,304,500
Liabilities
Current Liabilities		Total Liabilities: The families total external financial commitments (what it owes).		Current Liabilities: Financial obligations expected to be paid within 12 months
Credit Card Balance	$2,000
Total Current Liabilities	$2,000
Non Current Liabilities
Mortgage	$1,000,000			Non Current Liabilities: Financial obligations which are not expected to be paid within 12 months
Total Non-Current Liabilities	$1,000,000
Total Liabilities	$1,002,000
Net Asset [Equity]	$302,500	Net Asset [Equity]: Total Assets less Total Liabilities

Professional Example

Below is a basic example of a Not-for-profit organization's Balance Sheet. 

Item	Amount
Assets
Current Assets		Total Assets: Everything that the organisation owns/has with it's control		Current Assets: Cash and other assets which can be converted into cash in the next 12 months
Cash at bank	$41,500
Accounts receivable (fees & grants owed)	$10,000
Prepaid expenses	$5,000
Total Current Assets	$56,500
Non-Current Assets				Non Current Assets: Assets which are not expected to be converted into cash within the next 12 months
Property and buildings	$850,000
Equipment and furniture	$45,000
Total Non-Current Assets	$895,000
Total Assets	$951,500
Liabilities
Current Liabilities		Total Liabilities: The organisations total external financial commitments (what it owes).		Current Liabilities: Financial obligations expected to be paid within 12 months
Accounts payable	$40,000
Staff leave entitlements	$35,000
Total Current Liabilities	$75,000
Non-Current Liabilities				Non Current Liabilities: Financial obligations which are not expected to be paid within 12 months
Long-term loan	$300,000
Total Non-Current Liabilities	$300,000
Total Liabilities	$375,000
Net Asset [Equity]	$576,500	Net Asset [Equity]: Total Assets less Total Liabilities

Key Take Away 

A balance sheet tells you how financially strong your organisation is right now by showing what it owns, what it owes, and whether it has enough net assets to remain stable and sustainable.

Are your assets growing and liabilities decreasing in value? If your liabilities start to become larger than assets, your organization is in trouble!

Next in this series: Understanding the Cash Flow Statement: Why Profit Doesn’t Equal Cash