Nonprofit Liquidity Footnote: Tell the Story Behind the Number

By Steve Anseth, CPA 

The numbers don’t lie, but they don’t always tell the whole story. At Abdo, Eick & Meyers, this oft-used statement has long been one of our mantras. Recently, it seems the Financial Standards Accounting Board (FASB) has decided to follow it, too.

Effective for years beginning after December 15, 2017, FASB requires nonprofit organizations to include a liquidity footnote on their financial statements that includes both quantitative (a table with numbers) and qualitative (a paragraph explaining the numbers) information. The purpose of the footnote is to provide financial statement readers with more transparency and insight into a nonprofit’s liquidity, or the amount of cash it has “on hand.” FASB has said it hopes the footnote will allow readers to better assess the nonprofit’s ability to meet its commitments, debt service, or programmatic goals in the next year.

Of course, your nonprofit’s financial statement readers are likely to include its major donors, which means what you include or don’t include in your footnote could have significant consequences for your nonprofit. To help you present your numbers in the best light, here are a couple things you should know:

The math matters. 

As I mentioned, the footnote includes a table meant to provide quantitative information about your nonprofit’s liquidity. Specifically, the table should communicate the availability of your nonprofit’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year.

When determining how to present the required quantitative footnote, consider choosing a format that’s easy for readers to follow. Generally, your footnote should include the nonprofit’s total financial assets, less those unavailable for general expenditures within one year due to contractual or donor-imposed restrictions and board designations. This calculation should equal the nonprofit’s financial assets available to meet cash needs for general expenditures within one year.

Of course, there are several steps to follow and figures to calculate when preparing the footnote; it’s important that you get it right. This means making sure you’re properly recognizing donor contributions (i.e., conditional or unconditional) and accounting for investments. The number you end up with is the one you’ll have to explain in the qualitative section.

 Explain the “why” behind the number.

I’ve had several clients ask me: “Steve, what’s a good number?” My response is always “there’s no answer as to what’s a good number.” That’s why the qualitative section of the footnote is so important. This is your chance to let your readers know why the number is what it is—in other words, to explain your liquidity situation.

If the number isn’t what you’d like it to be, explain the cause. For example, say your nonprofit has $1 million in both revenue and expenses and the number you end up with on the table is $50,000. That’s less than one month’s worth of expenses, meaning you could be out of cash by the end of January if contributions aren’t coming in. So, in this case, you would want to explain why the number is so low. On the other hand, if it’s $700,000, you have almost nine months of your budget in the bank at the beginning of the year. A major donor might look at this and say “why should I write you a check for $50,000 if you’re sitting on $700,000?” This is when you would want to explain how quickly your nonprofit expects to burn through this amount.

We can help you tell the story behind the numbers.

There isn’t a “good” number, and there isn’t a one-size-fits-all answer when it comes to how to explain a nonprofit’s liquidity situation. If you have questions about how you could improve your nonprofit’s liquidity number or the verbiage around its liquidity situation, we’re here to review your current liquidity footnote and offer suggestions. Taking action sooner rather than later can help you make the most of your nonprofit’s liquidity situation in the coming year—and write a story with a happy ending.

Steve Anseth, CPA

Nonprofit Group Leader

As the Nonprofit Group Leader, Steve helps organizations succeed by improving their operations and internal controls.

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