Reading each column of your Statement of Activities gives you a more accurate and complete story of the results of your operations. It is our tendency to immediately look at the total column on a report, but that can leave you asking many more questions, rather than understanding where you’ve been this year so far. The Statement of Activities reports the results of operations of your organization. It is divided into three columns; net assets without donor restrictions, net assets with donor restrictions, and the total column.
The first column, net assets without donor restrictions, is the true results of your organization’s operations. On the revenue side, it combines the unrestricted revenue received this year and the restricted revenue that has been released for use this year. This is netted against the operating expenses to arrive at a net surplus or deficit from operations. This column alerts you to problems with the current year’s operations, it is the set of numbers that should be compared to the budget (assuming the budget is accrual and only considered current year revenue). If you are not expecting a deficit, you should be comparing these numbers to your budget to understand where the corrections need to be made.
The second column, net assets with donor restrictions, tells the story of how much you have in restricted revenue reserves to last you through the current and future years. This column begins by telling you how much restricted revenue has come in this year and how much restricted revenue you’ve used up (released) this year. The revenue you have used up can be a combination of revenue you received this year and in prior years. The result is netted against the restricted revenue you had at the beginning of the year to arrive at how much restricted revenue you still have. What does a surplus in this column mean? That you have earned more restricted revenue this year than you have used, and that you are increasing your reserve of restricted revenue to be used this year and into future years. A very large surplus could simply mean that you received a large multi-year grant this year that was recognized entirely this year but will be used in the next few years. What about a deficit? A deficit means that you have used more this year than has come in. But you may still have a large balance that will last you through several more years if you are just beginning to spend a multi-year grant. Or maybe the grants you are expecting for expenditure next year are taking longer to commit. If you are running a deficit and you are depleting the reserve of restricted grants, you may need to put a plan in place for future year funding.
When you add the two columns together, the result will be influenced by the second column, assets with donor restrictions. Beware of the panic that comes from a deficit in the total column.
We have seen deficits in that total column that do not indicate a cause for concern. An organization increased its reliance on government and reimbursement grants, which are not reflected in the Statement of Activities until spent. At the same time, they used up the small amount of restricted revenue, thus creating a deficit on column two. The total column is skewed by the second column, but there is no reason for alarm. Another organization switched mostly to fee-for-service contracts and reduced their reliance on restricted grants, also resulting in a deficit on second and the total column. Understanding the reason for the deficit and focusing on the results of the first column will help you gain a better perspective.