# Statement of Financial Position <div class=iframe-container> <iframe width="560" height="315" src="https://www.youtube.com/embed/gLKCbRXZss8" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> </div> The Statement of Financial Position (also known as the Balance Sheet) 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 Activities (Income Statement)]] and the [[Statement of Cash Flows]]). The Balance Sheet reports a company's Assets, Liabilities, and Net Assets at a specific point in time. In brief, it offers a "snapshot" of what a company owns and what it owes to lenders and investors. From another perspective, the Balance Sheet shows all of the organization's *uses* of funding (assets) and all of the *sources* of funding (liabilities, investment, and equity/net assets) that contributed to or has claim to those assets. The name of the statement comes from the fact that the sources and uses always balance (Assets = Liabilities + Net Assets). > Equity vs. Net Assets > "Net Assets" describes the financial value that would remain if an organization sold everything it owned (Assets) and paid off every debt it owed (Liabilities). In commercial or for-profit companies, this remainder belongs to the owners or investors (which is why it's called "Equity"). In a nonprofit organization, this remainder belongs to nobody...or more specifically, it belongs to the public trust (see [[What's a Nonprofit Arts Organization?]]). In nonprofit contexts, there is no Equity because there are no owners. So we use the broader phrase, "Net Assets." These financial statements are included in the [[_FRAMEWORKS]] section of this site because they provide a way of observing and evaluating the financial dynamics of an arts organization. And, because this site focuses on efforts that cannot, or choose not to, capture their full cost of operation through direct sales or investment (see [[What's a Nonprofit Arts Organization?]]), the Balance Sheet offers an essential framework to understand and manage for a sustainable, resiliant, and vital arts organization. ## What the Company Owns and What It Owes It is essential to remember that any financial statement takes the perspective of the organization, and *not* the perspective of its debtors, owners, or investors. Confusing this perspective can distort your view and understanding of what the business is, and how it works. From the *company's* perspective, the Balance Sheet is a framework for capturing every financially valuable resource it owns (more broadly, that it owns *rights* to hold and control), as well as every *obligation* it has to the outside world. While an actual Balance Sheet in a financial report is presented vertically (Assets at the top, then Liabilities, and finally Net Assets), it's useful to consider a Balance Sheet as having two sides. On the *left* side are all the Assets. Assets are listed in order of liquidity, or how quickly you can convert the item into cash. Rights (What We Own, Uses of Funds) | Obligations (What We Owe, Sources of Funds) ---|--- **Assets** | **Liabilities** Cash| Marketable Securities | Accounts Receivable | **Net Assets** Inventory | Fixed Assets | On the *right* side are all the *obligations* that relate to those Assets. There are two categories of obligation: Liabilities (or debt) and Net Assets (financial value available to the company after all debts are paid, in for-profit firms this obligation is to the owners or investors). Liabilities are sorted by how soon they are to be paid. Net Assets include different categories in for-profit and nonprofit organizations (we'll keep it simple here). Rights (What We Own, Uses of Funds) | Obligations (What We Owe, Sources of Funds) ---|--- **Assets** | **Liabilities** Cash| Short-Term Debt Marketable Securities | Long-Term Debt Accounts Receivable | **Net Assets** Inventory | Balance from Previous Statement Fixed Assets | +/- Change Since Previous Statement From the perspective of the company, only the *left* side holds real and tangible value. There is no money or other objects of value on the *right* side, only obligations to outsiders. While we describe items on the *right* side in terms of money, there is no money there. As a (possibly counter-intuitive) result of this Balance Sheet presentation, the net value of any business is always zero. Every dollar or object of value is obligated to an outside party, either debtor, owner, or investor. Sure, debtors and owners can sometimes sell their stake in the business, but that value shows up on *their* balance sheet, not the business'. ## Why is the Balance Sheet so Important and Challenging for Nonprofits? First, the Balance Sheet is important to *any* formal organization, as it describes the current value of the enterprise and its obligation to outside parties (debtors or owners/investors). But the focus and use of a Balance Sheet is different for a for-profit and a nonprofit firm. For a for-profit firm, the primary goal of the Balance Sheet is on the *right* side, specifically the growth of Net Assets. For-profit firms are in the business of maximizing financial return to the owners/investors by finding the best arrangement of assets, put to best use, and funded appropriately by equity or debt. For a nonprofit firm, the primary goal of the Balance Sheet is on the *left* side, because the business needs to attain, retain, and animate assets to achieve its public purpose. Because that collection of assets cannot, or by choice will not, capture its full cost from direct sales or investment (see [[What's a Nonprofit Arts Organization?]]), the challenge becomes how to source those assets and their operation over time. See [[Steppenwolf|the Steppenwolf case study]] for real-world examples of the challenges of a changing Balance Sheet. --- ## Sources - Frampton, Peter, Mark Robilliard, and Toby York. *The Joy of Accounting: A Game-Changing Approach That Makes Accounting Easy*. London: Wealthvox Limited, 2020. ## Tags (click to view related pages) #frameworks #functions/finance #functions/accounting #functions/spaces_systems #video #sapling