How to Prepare a Nonprofit Statement of Cash Flows

Preparing a nonprofit statement of cash flows means taking the change in your net assets, stripping out every non-cash item and timing difference, and sorting what remains into three buckets: operating, investing, and financing activities. The finished statement reconciles your beginning cash balance to your ending cash balance and shows exactly where the money moved during the year. Most nonprofits build it using the indirect method because the inputs come straight from financial statements you already have.

Documents to Pull First

The statement is largely a comparison exercise, so gather everything before you start calculating:

Statement of financial position for both the current and prior year. Every change in an asset or liability account either generated or consumed cash, and you need both years side by side to see the changes.
Statement of activities for the current year. The change in net assets is your starting figure under the indirect method.
General ledger detail, so you can verify how large or unusual entries were classified.
Depreciation and amortization schedules. These non-cash expenses get added back in the operating section, and wrong figures throw off the whole reconciliation.
Loan amortization schedules, which break each payment into principal and interest. Those two pieces go to different sections.
Records of donor restrictions, so you can identify which contributions were restricted for long-term purposes.

The side-by-side balance sheet comparison drives most of the math. Your job is to figure out which section each change belongs in.

The Three Sections You’re Building

FASB’s accounting standards require every cash receipt and payment to land in one of three sections.¹ Knowing the boundaries before you start classifying saves rework.

Operating activities capture cash from day-to-day mission work. Inflows include program service fees, unrestricted donations, membership dues, and investment income not restricted for long-term purposes. Outflows include salaries, rent, utilities, supplies, and payments to contractors. This is usually the biggest section.

Investing activities reflect cash spent on or received from long-term assets. Buying a vehicle for your food delivery program, purchasing investment securities for a reserve fund, or selling property all belong here. Proceeds from selling endowment investments and the returns on those investments are also investing activities.

Financing activities track cash related to your long-term capital structure: proceeds from bank loans, principal repayments on mortgages, and donor contributions restricted for long-term purposes such as endowment gifts or capital campaign funds.

Choose the Direct or Indirect Method

You have two options for presenting operating activities. The investing and financing sections look the same either way.

The indirect method starts with the change in net assets from your statement of activities and works backward to arrive at cash from operations. Most nonprofits use it because the data comes from statements already in hand.

The direct method lists actual cash receipts and payments by category: cash received from donors, cash received from program fees, cash paid to employees, cash paid to suppliers. FASB has long encouraged this format because it gives readers a more intuitive picture of where cash comes from and where it goes. ASU 2016-14, effective for fiscal years beginning after December 15, 2017, eliminated the requirement that nonprofits using the direct method also present the indirect reconciliation.² That change lowered the cost of choosing the direct method, though the indirect approach is still the more common one in practice.

The rest of this walkthrough uses the indirect method.

Building the Operating Section Under the Indirect Method

Start with the change in net assets. Then apply three groups of adjustments.¹

Add back non-cash expenses. Depreciation, amortization, and any other charges that reduced net assets without using cash. If you recorded $15,000 in depreciation on your building, add that $15,000 back.

Remove gains and losses on long-term assets. Gains or losses on sales of equipment, investments, or other long-term assets belong in the investing section, so their effect on net assets must come out of operating activities. A gain gets subtracted; a loss gets added back.

Adjust for changes in current assets and liabilities. Work through accounts receivable, grants receivable, prepaid expenses, accounts payable, accrued liabilities, and deferred revenue. An increase in accounts receivable means you recognized revenue that hasn’t turned into cash yet, so subtract it. An increase in accounts payable means you incurred expenses you haven’t paid yet, so add it back. Decreases work the other way.

What remains is net cash provided by (or used in) operating activities. If you had tracked every individual cash receipt and payment under the direct method, you would arrive at the same number.

Classifying Restricted Contributions

This is where nonprofit cash flow statements diverge most sharply from for-profit ones, and where mistakes happen most often. The rule: contributions restricted by the donor for long-term purposes go in financing activities, not operating.

An endowment gift is the clearest example. A donor gives $500,000 with the stipulation that the principal must remain invested permanently. That cash receipt appears under financing activities because it changes your long-term capital structure rather than funding day-to-day operations. Capital campaign contributions earmarked for building construction or major equipment purchases follow the same logic.

Unrestricted contributions and contributions with temporary restrictions that support current operations stay in operating activities. The classification depends on the donor’s intent, not on how your organization labels the funds internally. A contribution restricted for “next year’s literacy program” supports operations and stays in operating. A contribution restricted for “the building endowment” is financing.²

Getting this wrong overstates operating cash flow and can mislead your board into thinking the organization is more self-sustaining than it really is.

Handling In-Kind and Other Non-Cash Items

The statement reports only actual cash movements. That means non-cash transactions are excluded from all three sections, which catches people off guard because the statement of activities includes significant in-kind contributions.

If a law firm donates $40,000 worth of pro bono legal services, that amount appears as both revenue and expense on your statement of activities but never touches the cash flow statement. Under the indirect method, you add back the revenue and subtract the expense, and the net effect is zero. The cleaner approach is to exclude in-kind items from your cash flow worksheet from the start.

Donated securities deserve special attention. If your organization receives stock and holds it before selling, the receipt itself is not a cash flow. When you eventually sell, the proceeds are an investing activity. If your policy requires immediate liquidation within a few days of receipt with no discretionary holding period, the cash proceeds are classified as operating for unrestricted gifts, or financing if the donor restricted them for long-term purposes.

Significant non-cash investing and financing transactions still need to be disclosed, just not on the face of the statement. They go in a supplemental schedule or footnote. Common examples: receiving a building as a gift, acquiring equipment through a donated mortgage, converting debt to equity, and obtaining a right-of-use asset in exchange for a lease liability.

Lease Payments Under Current Standards

The lease standards that took effect in recent years changed how lease payments appear on the cash flow statement, and the treatment depends on lease type.

For operating leases, which cover most nonprofit office and facility leases, cash payments go in operating activities. For finance leases, the principal portion of each payment goes in financing activities and the interest portion goes in operating activities. Under the indirect method, the non-cash amortization of the right-of-use asset for both types of leases is added back as an adjustment in the operating section, similar to how you treat depreciation on owned assets.

Reconciling to Ending Cash

Once you have net cash for each of the three sections, the assembly is mechanical. Add the three net totals to get the overall net increase or decrease in cash for the period. Add that to your beginning cash and cash equivalents balance. The result must exactly match the ending cash and cash equivalents balance on your current statement of financial position.

Restricted cash counts. If your statement of financial position shows restricted cash as a separate line item, your beginning and ending balances on the cash flow statement need to include it, and you must present a reconciliation showing how the total ties back to the individual balance sheet lines. Transfers between unrestricted cash and restricted cash are internal movements, not cash flow activities, and are not reported.

When the numbers don’t tie, check these areas in order:

Non-cash items that were not removed. Depreciation, in-kind contributions, and unrealized gains or losses on investments are the most common culprits.
Restricted cash not included in the ending balance. If your balance sheet breaks it out separately, confirm your cash flow statement rolls it in.
Loan payments not split correctly. Principal goes under financing; interest goes under operating. Putting the full payment in one section throws off both.
Gains or losses still embedded in operating activities. If you forgot to remove a gain on the sale of equipment from operating activities and then reported the full cash proceeds in investing, you double-counted.

Balancing on the first try is rare. Expect to trace several items back to the general ledger before everything lines up.

Required Supplemental Disclosures

Regardless of method, certain disclosures must accompany the statement. Under the indirect method, disclose the amount of interest paid and income taxes paid during the period, either on the face of the statement or in the notes. Most nonprofits are tax-exempt, so the income tax disclosure is often zero or nominal, but it still needs to appear.

Disclose all significant non-cash investing and financing transactions separately. A donated building, an equipment purchase financed entirely by a seller note, or a lease liability recognized in exchange for a right-of-use asset all bypass your bank accounts but still represent real changes to your financial position. Use a narrative or table, either on the same page as the statement or in the notes.

If your statement of financial position breaks out cash, cash equivalents, and restricted cash across multiple line items, include a reconciliation showing how those individual amounts tie to the single beginning and ending totals on your cash flow statement.

Mistakes Auditors Catch First

A handful of errors show up in nonprofit cash flow statements over and over, and auditors flag them immediately.

Classifying restricted contributions as operating activities. Endowment gifts and capital campaign funds belong in financing.
Including in-kind donations as cash inflows. They have a fair market value on the statement of activities, but they are not cash.
Forgetting restricted cash in the reconciliation. Your ending balance must include it.
Omitting non-cash transaction disclosures. Receiving a building, exchanging assets, or entering a finance lease generates no cash flow but still requires a supplemental disclosure.
Netting items that should be reported gross. Proceeds from selling one investment and cash used to buy another are separate transactions. Report each individually rather than showing only the net difference.

Working through the statement carefully the first time is faster than reconstructing it under audit questions later.

1
Financial Accounting Standards Board. Statement of Financial Accounting Standards No 95 – Statement of Cash Flows
2
Financial Accounting Standards Board. Accounting Standards Update No 2016-14