Nonprofit finance terms and concepts

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.
A loan can be amortized in several ways, including: (a) in equal installments of principal and interest, often called “mortgage amortization,” where the interest component of the payment reduces as the principal is paid down; (b) in regular payments of varying amounts, often called “commercial amortization,” which result from paying off a constant principal each installment plus interest on the amount of principal owed; and (c) in very irregular principal payments plus interest, often incorporating a larger final payment. Any time the loan maturity is shorter than the amortization term, a balloon balance will result. See balloon.
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, inventories, 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. 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 auditor can have an unqualified opinion, stating that the organization appears to have followed all accounting rules appropriately and that the financial reports are reasonably accurate representation of the company's financial condition, or a qualified opinion, highlighting certain compliance issues or limitations in the company's statements. See review and compilation.

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

Usually defined as a percentage less than 100% of the available collateral, for instance, 80% of eligible accounts receivable. In order to fully secure a $100,000 line of credit using an 80% advance ratio, the borrower must have $125,000 in eligible accounts receivable at the time the loan is advanced. Typical advance ratios range from 50 to 80%. A borrowing base may be used as a control mechanism even if the loan is not secured by a lien on the receivables. See line of credit.
These are often big-ticket items, like replacing the roof, which are difficult to accommodate in a single year's budget. Also known as a replacement reserve. Typically, these are unrestricted, but board-designated funds.
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 is 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. See working capital, change/growth capital, and endowment.
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.
Healthy organizations 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, “capitalized” refers to the purchase of fixed assets which do not appear on the income statement, but on the balance sheets, where they are depreciated over their useful life.
The case statement helps align board members, funders, and supporters to a shared organizational vision.
Often required on construction projects prior to the entity occupying the space being allowed to move in.
Change Capital is defined as an investment that is:

  1. Extra-ordinary, and of limited duration: it is not meant to function as regular earned or contributed revenue.
  2. Flexible: how the organization chooses to spend the investment matters less than what it achieves.
  3. 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.
  4. Must support long-term sustainability: Once the capital is spent, the organization should 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 its programs or operations
  • Supporting growth, downsizing, or other adjustments to the size and scope of the organization.

Change Capital is not intended to be used as a substitute for revenue. For example, it cannot be used to cover structural or unplanned deficits, paying for an existing program, or cover ongoing, regularly-needed improvements (ie., facility maintenance). Instead, the spirit of Change Capital is to ensure that an organization emerges from a planned period of extra-ordinary change entirely stable and sustainable. Unfortunately, in our client work, NFF has often seen that change can actually 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 organizations pursuing Change Capital should conduct in-depth 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:

Also known as annual clean-up period.

The fee is often paid partially at application, partially at the acceptance of the commitment and partially at closing. Also known as commitment fee and 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. See audit and review. The CPA states no opinion about the accuracy of the statements.
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.
May be done to help the organization understand its financial underpinnings, determine the likelihood that an organization can complete a project successfully or the likelihood that an organization can repay a loan. See underwriting process.
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.
Debt may or may not secured by a pledge of assets. Also known as borrowed money/funds.
This situation creates an obligation, and thus a liability, for the organization to provide goods or services in the future. (Note: Financial Accounting Standards 116 and 117 reduced substantially the instances in which nonprofits should use such categorization by introducing the concept of temporarily restricted net assets.)
They include such items as: program staff and systems, materials required to deliver specific services, and travel costs required to deliver services.
While the corpus of an endowment is typically permanently restricted, unrestricted investment reserves (sometimes called board-designated 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 to generate adequate annual income and may compete with other fundraising efforts.
The terms of a real estate purchase often require the seller to pay for and supply a satisfactory Phase I audit as a condition of the sale, and a lender taking a mortgage on a real estate property will usually require a satisfactory review of the environmental report prior to closing the loan transaction. If the report is inconclusive or reveals possible contamination, more testing in the form of a Phase II may be required.
In for-profit accounting, refers to the difference between total assets and total liabilities and may be called “owners’ equity.”
Mission fulfillment over the long-term depends on covering the direct costs of delivering programs and the indirect costs that support effective program delivery. These indirect expenses include such items as: fundraising staff and systems, management salaries, occupancy and other infrastructure. There is no “right” ratio of direct to indirect costs – the right expense mix is the one that leads to measurable mission outcomes. Indeed, growing organizations often see indirect costs rise as they build their infrastructure ahead of new program delivery.
Also known as a capital project.
FAS 116 deals with contributions made and received while FAS 117 deals with financial statement format.
Financial statements are usually compiled on a quarterly and annual basis. The term financial statement is commonly used to describe the statement of activities alone, which does not provide a complete picture of an organization’s financial health/situation.
Also referred to as fixed price, as distinct from contracts priced at time plus materials. Generally thought to protect the client from unexpected cost overruns.
It does not warrant anything regarding payment of taxes owed to the government authority.
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 because impact investors expects to at least be repaid (and often to earn additional interest or profits). Impact investments differ from regular investments because 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 website or read Impact Investing.
In-kind expenses typically equal in-kind revenue on the income 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 costs – the right expense mix is the one that leads to measurable mission outcomes. Indeed, growing organizations often see indirect costs 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.
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.
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, lines of credit, construction loans, current portion of long-term debt, short-term notes payable, and long-term debt.
In some cases, the creditor will have legal claim against an asset, but not actually hold it in possession, while in other cases the creditor will actually hold the asset until the debt is paid off.
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.
Also known as undesignated unrestricted net assets.

Can also include the unused amount from lines of credit that are available to the borrower.

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; the guarantee; and, subordination and/or inter-creditor agreements.
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 and the ability to regularly generate revenue in excess of expenses. Mis-capitalization is a common problem among nonprofits. Excess cash is often 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 segregated 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 program-related investments (PRIs) are treated similarly to grants for tax purposes, an MRI is fundamentally a financial investment rather than a grant. 

(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.
They can include capital campaign grants, expenses related to capital projects, gains/losses in the investment portfolio, and one time or extraordinary transactions such as the sale or write-off of assets. May also be used to account for dollars passed through an organization—e.g., re-grant funds.
Charged by a lender as compensation for keeping an undrawn line of credit available to the borrower.
Excluded are one-time/episodic sources of income (such as capital campaign receipts, realized/unrealized investment gains and losses, gains from sale of property, and/or 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.
Also used as a shortened version of basis points and therefore might be used as a substitute for commitment fee, facility fee, or closing fee as in “How many points do you charge?”

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 borrow 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 US as institutions recognize the need for more creative approaches to achieving social outcomes.

See mission-related investments.

Gut rehab refers to major reconstruction, typically involving demolition of all but the “guts” of a building before renovating it. Also known as rehab.

It 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 individual support year after year.

It includes a statement of position (balance sheet), a statement of activities (income statement), a statement of cash flows, and may have notes. A review is not considered as independent a financial report as an audit would be but requires a higher level of due diligence than a compilation. See audit and compilation.
cash flows from operating activities, cash flows from financing activities, and cash flows from investing activities. See cash flow.
Regularly scheduled payments of principal and interest may often be made even though the debt is subordinated.
A title commitment is prepared prior to issuing a title insurance policy for a mortgage loan, which confirms the ownership of a 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, also known as a UCC-1 or a UCC-1a for the name of the form used for it or a financing statement, serves as public notice of a lender’s claim on certain assets of a borrower. See security agreement.
Use the calculation below to assess how many months of liquid cash you have available to pay your bills:

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 costs while waiting for revenue to come in. Strict accounting definition is current assets less current liabilities.