Glossary

Grants receivable is an example of accounts receivable. 

Examples include accrued salaries, accrued sales tax payable, and accrued rent payable. 

It is important for an organization to have plenty of liquid resources to manage day-to-day operating needs before it can set aside resources for adaptability and durability needs. If an organization has more funds set aside for durability (e.g., an endowment), but no liquid resources to manage the day-to-day, that is what we call mis-capitalization.

Often used to track amounts that can be advanced by a lender to a borrower under a construction loan and helpful to ensure that there are sufficient funds remaining to complete and pay for the contract. 

One or more of three valuation methods are used: Sales Comparison (what similar properties have recently sold for), Cost (what it would cost to replace the property, net of accrued depreciation), and Income (derived from the expected future cash flow of the property). 

Appraisals can be “as is” or “as improved,” which includes the value created by future capital expenditures.

Examples include cash, short-term investments, accounts receivable, grants receivable, inventory, prepaid expenses, buildings, furniture, equipment, vehicles, and long-term investments.

In a loan transaction, it is critical to know the correct legal name of an entity and document it accordingly and accurately.

Also see certificate of incorporation.

The audit includes an opinion letter, a statement of financial position (balance sheet), a statement of activities (income statement), a statement of cash flows, and notes. An audit can provide either an unqualified or qualified opinion. An unqualified opinion states that the organization appears to have followed all accounting rules appropriately and that the financial reports are a reasonably accurate representation of the company's financial condition. A qualified opinion highlights certain compliance issues or limitations in the company's statements.  

See review, compilation and Generally Accepted Accounting Principles (GAAP).

See officer's certificate.

Another way to calculate the availability of resources is to take the financial assets of the organization and subtract restricted and designated net assets. You will often see this calculation in the liquidity and availability note in audits. You can take this calculation one step further and subtract liabilities to arrive at a more conservative measure.

Also known as undesignated net assets without restrictions.

Also known as statement of financial position. (This statement changes daily.)

See amortization.

Note that this is an internal designation and different than net assets with restrictions (from an outside donor).  

See also Market Value. 

The borrowing base is comprised of the assets (typically current receivables) against which the loan is borrowed and is used by lenders to calculate how much of the loan commitment may be drawn at any given time. 

See line of credit (LOC).

These are often big-ticket items, like replacing the roof, which may be difficult to accommodate in a single year's budget. Also known as a replacement reserve. Typically, the reserve is unrestricted, but a board-designated fund. 

The sum necessary for a building reserve can be determined by reasonably estimating the costs of improving and replacing capital equipment and facilities over a defined period of time, based on projected life spans for each system. There are a number of ways to determine this, the most common of which is a Systems Replacement Plan (SRP). 

This includes defining the officers, outlining the board composition and terms, the frequency of board meetings, the authority to enter into contracts for borrowing money and other purposes, and the number of signatures required to bind the entity legally.

It can be generated through surpluses, special fundraising, and/or borrowing. While revenue pays for business as usual, capital supports extraordinary, time-limited investments that contribute to an organization’s liquidity, adaptability, and durability. Different types of capital serve different purposes.

Also see endowment, change capital, revenue, and working capital.

The purpose of a capital campaign is to fund a high-cost strategic initiative such as a capital project. This fundraising drive takes place outside of (and in addition to) annual operating fundraising and is usually to raise funds for a facility (or capital project), an endowment, and/or reserves, though could be undertaken for a large strategic operating or programmatic initiative. 

It’s important to understand the difference between an expenditure and an expense. Though related, they’re actually different and have some important nuances.

An expenditure is the total purchase price of a good. For example, a company buys a $10 million piece of equipment that it estimates to have a useful life of 5 years. This would be classified as a $10 million capital expenditure and would be listed on the balance sheet as a long-term asset.

An expense is the amount that is recorded as an offset to revenue on an organization’s income statement. For example, the same $10 million piece of equipment with a 5-year life has a depreciation expense of $2 million each year. Other expense examples would be anything “consumable” within a year, e.g., paper, pencils, utility expenses, payroll.

While sometimes considered an “expense,” this item should not show up on the Statement of Activities. Instead, it should be capitalized and depreciated over its useful life and show up on the Statement of Financial Position as an increase in fixed assets and therefore on the Statement of Cash Flows in the investing section.

The higher you are on the capital stack, the lower your risk profile and the lower your returns. Conversely, the lower you are on the capital stack, the higher your risk but the greater your potential returns. 

A healthy capital structure (i.e., enough liquid and available assets to comfortably cover liabilities) helps organizations to take risks, innovate, and pursue new opportunities.

Organizations can make choices about how they are capitalized, understanding the relative risks and merits of various options—e.g., whether to buy a building or grow an endowment. Also, the term “capitalized” refers to the purchase of fixed assets which do not appear on the income statement, but on the balance sheet, where they are depreciated over their useful life.

The case statement helps align board members, funders, and supporters to a shared organizational vision.

Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less. Cash equivalents include bank accounts and marketable securities such as commercial paper and short-term government bonds.

The amount of cash generated (or used) by the organization’s operations. 

Often required on construction projects prior to the entity occupying the space being allowed to move in. A temporary certificate of occupancy (TCO) may be issued to allow some uses for a defined period of time while final steps are taken to obtain a C of O. 

Change Capital is defined as an investment that is: 

• Extraordinary, and of limited duration: It is not meant to function as regular earned or contributed revenue.
• Flexible: How the organization chooses to spend the investment matters less than what it achieves.
• Understanding: The funds are meant to support periods when the organization is experiencing volatility in its pursuit of change. During these periods, organizations must take risk and have room in their budgets for trial and error. As a result, Change Capital can, on occasion, cover planned, temporary operating deficits.
• Must support long-term sustainability: Once the capital is spent, the organization should have a strategy to be able to more fully cover costs using reliable revenue, until their next period of change.

Organizations use Change Capital for a variety of purposes, which include but are not limited to:

• Supporting projects (e.g., technology, facility, services) specifically intended to improve the efficiency or quality of programs or operations.
• Supporting growth, downsizing, or other adjustments to the size and scope of an organization.

Change Capital is not intended to be used as a substitute for revenue. For example, it should not be used to cover structural or unplanned deficits, pay for an existing program, or cover ongoing, regularly needed improvements (e.g., facility maintenance). Instead, the spirit of Change Capital is to ensure that an organization emerges from a planned period of extraordinary change entirely stable and sustainable.  

Unfortunately, in our client work, NFF has often seen that change can negatively reverberate throughout an organization for many years after the period of change has ended. This is one of the reasons why NFF advocates that an organization pursuing Change Capital should conduct in-depth strategic and business planning to effectively tie its goals for change to financial models that ensure recurring revenue after the change is over. 

NFF has written extensively about the need for Change Capital in a sector that rarely has the opportunity to pursue transformation with support that is patient, flexible, and well-planned. To read more about our ideas on Change Capital, visit these pages: 

• Case for Change Capital in the Arts
• For Ambitious Nonprofits, Capital to Grow (New York Times)
• All Flexible Funding is Not Created Equal
• Top 10 Traits Nonprofits Need to Make Change
• Build vs. Buy: the difference between capital and revenue

The change in net assets without restrictions is a representation of a “bottom line” without restrictions. 

The change in total net assets is an overall representation of a “bottom line.”

This is meant to demonstrate that the line of credit is being used for short-term liquidity needs rather than permanent working capital. Also known as an annual clean-up period.

The fee may be paid in installments: at application, at acceptance of the commitment, and at closing.

Also known as a commitment fee or facility fee.

CDFIs finance nonprofits and community businesses that spark job growth and retention in underserved markets across the nation.

It includes a statement of position (balance sheet), a statement of activities (income statement), a statement of cash flows, and may or may not have notes. The CPA states no opinion about the accuracy of the statements.

Also see audit and review.

The funds are disbursed as needed or in accordance with a pre-arranged plan, and the money is repaid upon completion of the project, often from the proceeds of a long-term loan, e.g., a mortgage.

In a capital (or facility) budget, an amount budgeted (usually a percentage of total construction costs) to cover unexpected hard costs or soft costs. Contingency can also be used in preparing the annual operating budget.

Also see earned revenue.

The purpose is the purchase of an asset, which directly impacts the capital structure (i.e., balance sheet) of the organization, and can be used when referring to the purchase of asset side of the balance sheet.

It often allows lenders to provide more financing than they could under ordinary circumstances, or lend to borrowers that do not meet traditional risk standards.

May be done to help the organization understand its financial underpinnings, determine the likelihood that an organization can complete a project successfully, or determine the likelihood that an organization can repay a loan.

See underwriting process.

Also see credit .

They are usually presented in order of liquidity on the balance sheet and include cash and cash equivalents, accounts receivables, inventory, prepaid, short-term investments, and other short-term assets.

A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted its current assets to cash. 

See assumed name.

Therefore, the organization will not have to pay back the loan or borrowing. To receive debt forgiveness, a borrower typically must apply for or qualify for a forgiveness program.  

See creditor. 

Note: Financial statements prepared on an accrual basis will show interest expense on the Statement of Activities, while changes in principal balance will appear on the balance sheet.

This situation creates an obligation, and thus a liability, for the organization to provide goods or services in the future. For example, if an organization cancels classes due to restrictions placed on the organization due to a pandemic, the organization will have to pay back the tuition owed to the student or family for the classes it did not hold.

See surplus. 

Accumulated depreciation can also be used as an approximation of the amount needed to replace fixed assets over time.

They include such items as program staff, systems, materials, and travel required to deliver specific services.

It is important for an organization to have plenty of liquid resources to manage day to day operating needs before it can set aside resources for adaptability and durability needs. If an organization has more funds set aside for durability (e.g., an endowment), but no liquid resources to manage the day to day, that is what we call mis-capitalization.

See contributed revenue.

Endowment funds may provide income in perpetuity (permanent endowment) or for a specified period (term endowment). Endowment funds are also part of net assets with donor restrictions. While the corpus of an endowment is typically permanently restricted, unrestricted investment reserves (sometimes called board-designated, or quasi endowments) can serve the same function while providing leadership with flexible use. NFF encourages nonprofits to prioritize raising flexible forms of capital since endowments need to be large enough to generate adequate annual income and may compete with other fundraising efforts.  

Also see net assets with restrictions.

The purpose of an engagement letter is to set expectations for both parties involved. 

If the real estate is pledged as collateral to get a loan, the lender will usually require (at the borrower’s expense) an environmental report as a condition of making the loan. If Phase I finds Recognized Environmental Conditions (RECs), it may recommend Phase II be conducted, which includes testing of actual soil, soil vapor, and groundwater for the presence of contamination in order to determine appropriate remediation.

The purpose is the payment necessary to earn revenue, and directly impacts the profitability of the organization. 

For example, the acquisition of a building or other physical space through purchase or leasehold; a renovation; a construction project; a relocation; a change in number of sites (i.e., expansion or consolidation); or a major equipment purchase.

Also known as a capital project.

Cash, stocks, bonds, mutual funds, bank deposits, and receivables are all examples of financial assets. Unlike land, property, or other physical assets, financial assets do not necessarily have inherent physical worth or even a physical form. Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry. (Source Investopedia)

In for-profit accounting, it refers to the difference between total assets and total liabilities and may be called “owners’ equity.”

Financial Accounting Standards 116 (contributions made and received) and 117 (financial statement format) govern the financial accounting of the nonprofit sector. Note that FASB is not a compliance agency; it does not monitor or review audited financial statements.

A complete financial statement includes a Statement of Financial Position (balance sheet), a Statement of Activities (income statement, profit & loss statement, a Statement of Cash Flows, and often a statement of functional expenses. 

Financial statements are usually compiled on a quarterly and annual basis. The term financial statement may be used to describe the statement of activities alone, which does not provide a complete picture of an organization’s financial health/situation. 

See also book value.

The “Full Cost of Doing Business” is both an income statement and balance sheet view of all costs required for an organization to effectively deliver its programs/mission.

After covering day-to-day operating expenses – including overhead, or indirect expenses – nonprofits need surpluses sufficient to address their very real balance sheet costs. These costs come in the form of cash in the bank to meet liquidity needs (working capital); cash in the bank or liquid investments to protect against the reasonable market and environmental risks and take advantage of new opportunities (reserves); investment in new property and equipment (fixed asset additions); and debt principal repayments.

Items include security, job site insurance, temporary structures, demolition, and utilities.

Also referred to as fixed price, as distinct from contracts priced at time plus materials. GMP contracts are thought to protect the client from unexpected cost overruns.

It does not warrant anything regarding payment of taxes owed to the government authority.

See also accounts receivable.

Not to be confused with soft costs (e.g., legal, financing, architect’s, fundraising consultant and similar fees required for the project but that are not visible in the physical structure).

Impact investments can be made in nonprofits, for-profits, and investment funds and include both investments that generate market-rate, risk-adjusted returns as well as concessionary returns. Impact investments differ from charitable donations in that impact investors expect to at least be repaid (and often to earn additional interest or profits). Impact investments differ from regular investments in that the impact investor sets clear social goals for the investment and measures how well they are achieved. The term “impact investing” was coined in 2008, but the practice is decades old. In recent years, impact investing has received growing attention from individuals and institutions interested in developing new ways to unlock resources to achieve social goals. To learn more, visit the Global Impact Investing Network. 

In-kind expenses equal in-kind revenue on the income statement, in other words for every dollar of in-kind revenue there is a corresponding in-kind expense. 

Also known as statement of activities or profit and loss statement.

They include such items as: fundraising staff and systems, management salaries, occupancy, and other infrastructure. There is no “right” ratio of direct to indirect expenses – the right expense mix is the one that leads to measurable mission outcomes. Indeed, growing organizations often see indirect expenses rise as they build their infrastructure ahead of new program delivery.  

An organization’s full costs typically exceed the combination of direct and indirect expenses. Full costs include additional investments to strengthen the balance sheet (also known as the Statement of Position). For example, nonprofits that have facilities (or other fixed assets) to maintain and debt (or other liabilities) to pay down need to raise revenue in excess of expenses to support these investments.

See Full Cost.

This percentage is determined by using complicated formulas and a complex negotiation process between the government agency and the nonprofit. As a result of a 2015 Office of Management and Budget (OMB) ruling, this percentage must be a minimum of 10%.

See direct expenses.

Often defines the positions of the lenders with respect to priority of collateral filings, principal and interest repayment, and priority of repayment in the event of liquidation of the borrower or collateral.

See full definition of principal. 

Also, the revenue earned by a lender for use of their funds (e.g., loans to borrowers) or an investor on their investments (e.g., bond investments) over a period of time.

The entire loan amount (principal) is then either amortized over an agreed-upon time period or paid off in one lump sum payment (balloon).

Appreciation refers to an increase in the value of an asset over time. When an organization purchases a good as an investment, the intent is not to consume the good but rather to hold it into the future to create wealth. An investment always concerns the outlay of some resource today – time, effort, money, or an asset – in hopes of a greater payoff in the future than what was originally put in. 

It may be a commercial letter of credit, more often seen in international commerce, or a standby letter of credit. 

Examples include accounts payable, accrued salaries and benefits, accrued payroll taxes, deferred revenue, outstanding balances under lines of credit, construction loans, mortgages, notes payable, and other types of long-term debt.

General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management and have liability that's limited to their investment amount in the LP. A limited partnership is usually a type of investment partnership, often used as an investment vehicle for investing in assets such as real estate.

It is usually revolving, meaning amounts repaid can be re-borrowed up to the total committed amount and/or the limitations of a borrowing base. 

It is important for an organization to have plenty of liquid resources to manage day to day operating needs before it can set aside resources for adaptability and durability needs. If an organization has more funds set aside for durability (e.g., an endowment), but no liquid resources to manage the day to day, that is what we call mis-capitalization. 

May include the following: the loan agreement which details the terms of the loan including interest rate and repayment; the note or promissory note whereby the borrower promises to repay the obligation; any security agreements or mortgage, outlining the collateral securing the loan; a guarantee agreement that obligates another party to make payments if the borrower is unable; and, subordination or inter-creditor agreement that outlines the rights and collateral position of each creditor when more than one lender extends credit to the same borrower. 

The loan term may not be the same as the amortization, which determines the periodic repayment amounts and whether there is a large or balloon principal balance due at maturity. 

Also see debt.

Mis-capitalized organizations have limited adaptive capacity, lacking the flexibility to adjust their programming and operations in response to changes in the environment and demand for their work. Adaptive capacity is evidenced by the strength of the balance sheet (i.e., sufficient savings and reserves) and the ability to regularly generate revenue in excess of expenses.  

Mis-capitalization is a common problem among nonprofits. Excess cash is often mistakenly seen as “hoarding,” even though savings are usually indicative of long-term planning and risk management. Buildings and endowments are typically the only forms of capital associated with long-term stability, yet often these assets contribute to financial instability, particularly when other more liquid forms of capital aren’t built alongside them.  

Other contributors to mis-capitalization include current nonprofit accounting and reporting practices, which conflate capital with revenue. Capital investments (whether for change or other capital purposes, such as facility projects) are typically not separated from regular operating revenue and, therefore, distort the revenue reality by making an organization look healthier than it may be. As a result, most organizations lack enough of the right kinds of money at the right times to change, grow, innovate, take risk. 

While there is no legal definition for an MRI, this term is generally applied to impact investments that are part of a foundation's endowment and have a positive social or environmental impact while contributing to the foundation’s long-term financial stability and growth.

While a program-related investment (PRI) is treated similarly to grants for tax purposes, an MRI is fundamentally a financial investment rather than a grant. 

Also see net worth.

Also see endowment.

Also see property & equipment, fixed assets.

For example, a grant of $50,000 with reporting requirements that cost $10,000 is a net grant of $40,000.  

Funders should consider thinking in terms of net grants to support the funder-related requirements that are entirely separate from the actual intention of the grant and ensure that their requirements are commensurate with grant size.

Net working capital is also known simply as working capital.

Positive and increasing net worth indicates good financial health. Negative and decreasing net worth, on the other hand, is cause for concern as it might signal a decrease in assets relative to liabilities. 

See also net assets. 

They can include capital campaign grants, bequests, expenditures related to capital (or facility) projects, gains/losses in the investment portfolio (whether realized or unrealized), and one-time or extraordinary transactions such as the sale or write-off of assets, or forgiveness of loans.

Non-operating activities may also be used to account for dollars passed through an organization (e.g., re-grant funds). They may also be referred to as “below the line” activities, meaning they are excluded from the calculation of the operating surplus or deficit – the “bottom line.”

A typical non-use fee is 0.5% (50 basis points). Typically assessed on revolving lines of credit but may also be assessed on other types of loans. 

Charged by a lender as compensation for keeping an undrawn line of credit available to the borrower. 

Also see authorization of borrowing and borrowing resolution. 

Also see non-operating activities.

Excluded are one-time, extraordinary, or capital items such as funds passed through to other agencies, capital costs related to investment in property, losses from sale of property, and realized/unrealized investment losses.  

Also see operating activities.

Excluded are one-time/episodic sources of income (such as capital campaign receipts, bequests,  realized/unrealized investment gains, gains from sale of property, and other extraordinary items) and all restricted revenue.

A non-contravention opinion also affirms that the execution of the loan documents does not violate any other obligations the borrower may have. 

It is often referred to in the following categories: 

• Administrative expenses (sometimes called Management & General): Finance/Accounting/Human Resource (HR) staff salaries, audit and legal fees, IT (Information Technology) systems, executive management salaries, training, and insurance. 

• Fundraising expenses: Development staff, direct mail, event expenses, mailing expenses, donor management software. 

These categories are used for reporting on audits (in the Statement of Functional Expenses) and IRS 990 (in addition to program expenses). By nature, overhead expenses cannot be clearly attributed to a specific program. Some components of overhead (often staff expenses) can be allocated to different programs, but this is often imperfect, imprecise, and arbitrary. There are no universally accepted standards for how to allocate.

This ratio is an increasingly disregarded approach to assessing nonprofit impact given: 

• Outcomes are better measures of a nonprofit’s effectiveness and impact 

• Some administrative/fundraising costs can be arbitrarily allocated to different programs 

• Different organizations will allocate expenses differently 

• Appropriate overhead (administrative/fundraising) is necessary to deliver on mission/impact

Also see project manager.

Examples include insurance premiums and rent that may be paid for a twelve-month period at the beginning of the year.

Distinct from interest, which is the amount owed for using or borrowing the funds.

PRIs include loans, loan guarantees, linked deposits, and equity investments in nonprofits or social enterprises. PRIs come in many shapes and sizes, depending on what mission and financial goals the foundation is aiming to achieve. The return on investment is typically low, and capital is often recycled among charitable investments. For example, a foundation may create a low- or 0%-interest loan pool from which a group of their grantees can borrow from on an ongoing basis.

PRIs are one set of investment options in a growing and evolving number of financial vehicles that seek to blend social and financial return. While the number of organizations making PRIs is still small, interest continues to rise in the United States as institutions recognize the need for more creative approaches to achieving social outcomes.

Also see mission-related investment (MRI).

Also see construction manager and owner’s representative.

Often called fixed assets, P&E depreciates over time (except for land, which does not depreciate).

The value of these assets is recorded at the book value (the original cost) of the asset, not the market value (the value at which it could be sold).

To get there, we must eliminate racial disparities and improve outcomes for everyone through the intentional and continual practice of changing policies, practices, systems, and structures that prioritize measurable change in the lives of people of color. (sources: racialequitytools.org, raceforward.org)

See unrealized gain or loss.

Gut rehab refers to major reconstruction, typically involving demolition of all but the structural elements of a building before renovating it.

Plus a proposal of how the consultant would approach the work and what fees would be involved. 

See also request for qualifications (RFQ). 

See also request for proposals. 

Reserves can be established for many purposes, including emergencies/rainy days, capital improvement and building replacement needs, future investments and opportunities, mitigating future risk, and general operations.

NFF defines reliable revenue as distinct from capital.

Revenue is an estimate of the amounts of earned and contributed revenue with a track record of recurrence. In the case of contributed support, reliable revenue typically requires a fully built development capacity with a history of bringing in institutional and/or individual support year after year.

The review includes a statement of position (balance sheet), a statement of activities (income statement), a statement of cash flows, and may include notes. A review is not considered as rigorous of a financial report as an audit but relies on a higher level of due diligence than a compilation. A review of financial statements ensures compliance to GAAP and no material misrepresentations, but does NOT review internal controls for fraud, test numbers with source documents, or provide an opinion. It provides assurance, but not verification. Also see audit, compilation, and Generally Accepted Accounting Principles (GAAP).

See debt.

See hard costs.

See income statement. 

cash flows from operating activities, cash flows from financing activities, and cash flows from investing activities.

See cash flow.

See balance sheet, net worth.

It is repayable in liquidation only after other debts with a higher claim or priority have been satisfied. Loans can be subordinated with respect to payment, lien position, or both.

Also see deficit.

NFF puts the information provided from a survey into a financial model that forecasts the savings needed to fund the replacement schedule of specific systems and equipment.

The term sheet often serves as a starting point for negotiating and refining a more detailed set of terms and conditions that are documented in legally binding documents that are executed after the underwriting is complete and approval is obtained. 

Such as conflicting ownership records, tax liens, lawsuits, easements, and other defects, any of which could result in financial damage to the owner, or otherwise prevent them from enjoying unencumbered rights to the property.

If only one or two of these expense categories are the responsibility of the tenant, the lease is referred to as single- or double-net, respectively.

A UCC filing serves as public notice of a lender’s claim on certain assets of a borrower. 

Also known as a UCC-1 or a UCC-1a, for the name of the form used for it.

See security agreement.

See credit analysis.

See realized gain. 

Months of                                Unrestricted Net Assets -
Unrestricted Liquid      =               (PPE* - PPE Debt)        
Net Assets                                 (Total Expenses / 12)  

*PPE: Property, Plan & Equipment

Working capital covers predictable periods when cash outflows exceed cash inflows due to seasonal or cyclical volatility. It can be used to bridge payment delays or cover expenses while waiting for revenue to come in. The strict accounting definition is: current assets less current liabilities.