# Statement of Financial Activities > The *Statement of Financial Activities* or *Income Statement* tells the financial story of an enterprise over a period of time. In short, it shows the revenues, expenses, and the net result of those activities for the period. <iframe width="560" height="315" src="https://www.youtube.com/embed/xxJxrRCOK9Y?si=Z0UKtz0tJYdyRKDY" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen></iframe> The Statement of Financial Activities (also known as the Profit and Loss Statement or the Income Statement) is one of the three primary financial statements used by (and required for) formally organized business entities in the United States (the others being the [[Statement of Financial Position (Balance Sheet)]] and the [[Statement of Cash Flows]]). The Income Statement shows an organization’s income and expenses, and their net result, for a specific period of time. The Statement of Financial Activities connects to the [[Statement of Financial Position (Balance Sheet)]] by detailing and describing how the company's Net Assets increased or decreased over time. For nonprofit arts organizations, it's important to remember that the Statement of Financial Activities is a report taken “off the rack” from for-profit enterprise and applied to nonprofit ventures. And it comes with many assumptions and narratives related to profit-seeking entities. As one example, an income statement has a “top line” of revenue and a “bottom line” of profit or loss. In this story, revenue is the beginning and profit is the end. Expenses are the plot twists and the hero’s challenge in between. > **The Story of the For-Profit Income Statement** > Revenue > - Expenses > = Profit/Loss That is *not* the story of a nonprofit enterprise. For a nonprofit, the driving story is about *purpose*. That purpose comes at a cost. The financial story begins, therefore, with expense – with the “cost of mission.” Along the journey, earned revenue pays some of that expense, but won’t cover all of it. The remaining expenses define the “need for subsidy” and the opportunity for fellow travelers to share the burden of a common goal. > **The Story of the Nonprofit Income Statement** > Expenses (cost of mission) > + Earned Revenue > = Result of Operations (need for additional support) > + Contributed Revenue > = Net Revenue/Net Loss In short, the nonprofit story begins with expense, covers some of those expenses with earned revenue where possible, and then faces a chasm (deficit) or a bridge (surplus) for the journey to come. ## Transcript If you manage a non-profit arts organization, you're used to telling stories, but there's one story you're telling that may have the wrong plot. I'm Andrew Taylor. I'm on the Faculty of Arts Management at American University in Washington, D.C., and this is ArtsManaged, a series of resources about Arts Management, what it is, how it works, how you can get better at it. And in this video, we're talking about a story that many organizations tell every day, but they usually tell it upside down. And here I'm talking about the income statement, or the statement of financial activities. It's one of three required financial statements for any corporate non-profit in the United States, and it's an important bit of storytelling that really compels a lot of listeners to think and act in important ways. The statement of financial activities, or the income statement, tells the story of revenue and expense and result over a period of time. You might recall from a previous video that the statement of financial position, or the balance sheet, takes a snapshot. It's a still image of the organization in a particular moment in time. The statement of financial activities, or the income statement, is the story of a period of time, how things unfolded over a month, or a quarter, or a fiscal year. Like almost all financial statements, the statement of financial activities was inherited from the for-profit world, and it still carries a lot of the energy of its for-profit cousins. The traditional structure has revenue first, then you subtract all expenses for the period, and then you end up with a profit or loss. If you manage any business, this is a really important story to understand and to navigate over time, because if you spend more than you earn over a long period of time, you go out of business really quick. But there's a couple of things that make this particular structure complicated and counterproductive for a non-profit, mission-driven arts organization. For one, let's look at the story itself. An income statement tends to begin with revenue. Revenue is the input, the essential top line of any business enterprise. At the bottom is profit or loss. And in the middle are these nasty things called expenses, which you try your best to navigate so that you still have some of your revenue left when the year is over. So here, revenue begins the story as the hero, and profit ends the story, and everything in between, the expenses, is the hero's journey from beginning to end. Now, that makes perfect sense for a for-profit enterprise, but there's a couple of problems for the non-profit arts organization in that story. For one, as a mission-driven enterprise, you can't begin with revenue. You have to begin with expense. Essentially, you have a mission that you need to accomplish, and that mission carries a cost, and you have to figure out what that cost has to be to achieve your goal. Then, many organizations, arts organizations among them, have some opportunity to gather revenue to support those costs. The other challenge is that the traditional business approach puts revenue all in one bucket, but non-profit arts organizations have revenue of two unique kinds. One stream is earned revenue, which you gain through transactions, so ticket sales, gate fees, service charges to other organizations. But the other is contributed revenue, which you get through individual donors, foundation giving, grants, gifts, corporate giving, and other forms of contributed income. While these both flow in in dollars, they come from entirely different sources, so it's really important to think about them separately. So let's flip the script on the income statement as traditionally constructed, and think about the non-profit arts version that might help us tell and understand a better story. So the true story of the non-profit arts organization has to begin with expense. You have a mission to fulfill in the universe that you've claimed out loud through your mission statement, and that mission comes at a cost. You need people, money, and stuff to accomplish that mission, and that shows up as expense. So your story doesn't begin with revenue, it begins with expense. Then, for many arts organizations, there's opportunity for earned income. So you can charge ticket fees, you can charge gate fees, you can charge rent against the people using your facility. That helps recapture some of the costs and cover some of the expense of fulfilling your mission, but usually not all. So if you take expense, or your cost of your mission, plus your earned revenue, you come up with a result of operations. So this is what it looks like for you to just do your work with the expenses and the earned income, and for most organizations, that's going to be a negative number. Your result of operations then defines for you the need for support, or for subsidy, for contributed income, to help support the full expense of your mission. And then finally, you'll have the sum total, which is the net revenue or net loss from your full operations, including earned and contributed revenue. So I hope you've noticed a few things that we've done here to adjust the story of the non-profit income statement. For one, we begin with expense, with the cost of mission, instead of with revenue. For another, we separate earned and contributed income because they're different kinds of things. Earned income is direct response to your program or program activity through service to your community, people who are willing and able to pay for the services you provide. And the relation between those two define the result of operations, again, usually a negative number, that describes to supporters where and why their contributed income is necessary to successful fulfillment of your mission over time. Now in many places you tell this story, you're going to be required to follow the business version, revenue minus expense equals net gain or net loss. But in internal documents and documents you share with your donors and contributors and supporters and your board, you can tell the more nuanced story that begins with expense, with the cost of mission, that benefits from some income activity, but still leaves a need for support or subsidy. We all know that stories help us make sense and take action in our world. And the story of the income statement is an essential piece of the puzzle for a thriving and successful and impactful arts organization. So when you're reading and telling your story, be sure you're telling it right. --- ## Tags (click to view related pages) #frameworks #functions/finance #functions/accounting #video