Cash Flow vs Assets: What Charity Directors Must Know

Many charity directors assume that having valuable assets means their organization has strong financial health. However, cash flow and assets measure completely different aspects of a nonprofit's financial position, and understanding this distinction is critical for making sound operational decisions.

Assets show what an organization owns at a single point in time. Cash flow reveals how money moves through the organization to fund daily operations, pay staff, and deliver programs.

A charity can own property and equipment worth millions yet struggle to meet payroll if cash isn't flowing properly. Directors who don't grasp this difference may approve spending based on asset value alone, only to face unexpected cash shortages that threaten program delivery.

The statement of financial position lists assets and liabilities, but it doesn't show whether the organization has enough liquid funds to cover next month's expenses. Reviewing cash flow statements alongside other financial documents provides a complete picture of organizational stability.

This article explains how cash flow differs from assets in charitable organizations and what each major financial statement reveals. It also covers practical metrics for assessing financial health, tools for managing cash effectively, and best practices for transparent reporting.

Why Cash Flow Differs from Assets in Charities

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Cash flow tracks the actual money moving in and out of a charity. Assets represent what the organization owns at a specific point in time.

These two measures serve different purposes and tell distinct stories about a charity's financial health.

Definitions of Cash Flow and Assets for Nonprofits

Cash flow refers to the movement of money into and out of a charity during a specific period. The cash flow statement records actual cash transactions from operating, investing, and financing activities.

When a donor makes a payment, that's cash coming in. When staff salaries are paid, that's cash going out.

Assets appear on the balance sheet and include everything a charity owns that has value. Current assets are items the organization can convert to cash within one year, such as bank accounts, accounts receivable, and short-term investments.

Fixed assets and long-term assets include buildings, equipment, vehicles, and endowment funds that the charity plans to keep for more than a year. Net assets represent the difference between what a charity owns and what it owes.

This figure shows the overall financial position but doesn't reveal how much actual cash is available right now.

Key Differences in Nonprofit Contexts

The timing of when transactions are recorded creates the main difference between cash flow and assets. A charity might show substantial assets on its balance sheet but have little cash available to pay immediate bills.

This happens because assets include promised donations (accounts receivable) that haven't been collected yet, or valuable property that can't be quickly sold. A building worth $500,000 appears as an asset, but it doesn't help pay next week's utility bills.

Similarly, a $50,000 pledge from a major donor increases assets when recorded, but provides no cash until the donor actually transfers the money. Cash flow focuses exclusively on actual money movement.

The cash flow statement shows when cash arrives and when it leaves, regardless of when revenue was earned or expenses were incurred. This distinction matters greatly for charities that receive large seasonal donations or grants paid in instalments.

The Importance of Understanding Both

Directors need both measures to make informed decisions about their charity's financial health. Strong assets suggest long-term stability, while positive cash flow ensures the organization can meet immediate obligations like payroll and rent.

A charity with significant net assets might still face a cash crisis if most assets are tied up in property or unpaid pledges. Conversely, an organization with fewer assets but steady cash flow can operate effectively month to month.

The Legal Risk of Getting This Wrong: Director Liability for Insolvency

Directors who fail to distinguish between assets and cash flow face serious legal consequences. Under the Canada Not-for-profit Corporations Act (CNCA) and provincial equivalents, directors can be held personally liable for up to six months of employee wages and source deductions if the charity becomes insolvent—meaning it cannot pay its bills as they come due.

Even if a charity owns a building worth millions, if it lacks the cash to meet payroll or remit source deductions to the Canada Revenue Agency (CRA), it is technically insolvent. In such cases, directors may be sued personally for unpaid wages and taxes.

This liability exists regardless of whether directors acted in good faith. The law holds directors responsible for ensuring the organization remains solvent. Directors must monitor cash flow closely and take action before the charity reaches insolvency.

Source: Corporations Canada: Directors' Liability

Financial transparency requires nonprofit accounting that clearly presents both the balance sheet and cash flow statement. Directors who monitor both measures can spot problems early.

They'll notice when growing accounts receivable signal collection issues, or when investing activities consume too much cash needed for operations. Financial statements work together to provide a complete picture of organizational health.

Core Nonprofit Financial Statements and Their Roles

Nonprofit organizations rely on four standardized financial statements to track their financial health and meet regulatory requirements. The statement of financial position shows what the organization owns and owes.

The statement of activities tracks revenue against expenses. The statement of cash flows monitors actual cash movement through the organization.

Statement of Financial Position

The statement of financial position serves as the nonprofit equivalent of a balance sheet in the for-profit world. It provides a snapshot of the organization's financial standing at a specific point in time, typically the end of the fiscal year.

This financial statement divides information into three main categories. Assets include everything the organization owns or controls, such as cash, accounts receivable, investments, property, and equipment.

Liabilities cover all debts and obligations, including accounts payable, accrued expenses, and loans. Net assets represent the difference between total assets and liabilities.

A key distinction in nonprofit financial statements is how net assets are classified. Organizations must separate externally restricted net assets (funds earmarked by donors for specific purposes) from unrestricted net assets (resources available for general use), and may also have internally restricted net assets (funds set aside by the board for specific purposes).

This classification reflects donor intentions and helps directors understand which funds have limitations on their use. The statement of financial position helps board members assess whether the organization can meet its financial obligations and sustain operations long-term.

Statement of Activities

The statement of activities functions like an income statement for for-profit businesses and is sometimes called the statement of changes in net assets. This document tracks all revenue and expenses over a specific period, showing whether the organization operates at a surplus or deficit.

Revenue sources include donations, grants, program fees, investment returns, and other income that supports the mission. Expenses are categorized by their function, covering program delivery, administration, and fundraising costs.

The statement calculates the change in net assets by subtracting total expenses from total revenue. This financial statement provides transparency about how effectively the organization uses its resources.

Directors can evaluate operational efficiency and determine if spending aligns with mission priorities. The fund accounting approach used by nonprofits requires tracking different fund types separately, which this statement reflects through its revenue and expense classifications.

Statement of Cash Flows

The cash flow statement tracks the actual movement of cash in and out of the organization during a specific period. Unlike the statement of activities, which uses accrual accounting, this statement focuses solely on cash transactions.

Cash flows are divided into three categories. Operating activities include cash from donations, grants, and program revenue, minus payments for salaries, supplies, and operational costs.

Investing activities cover transactions involving long-term assets like property, equipment, or investments. Financing activities include cash from loans, endowments, or debt repayments.

This financial statement reveals the organization's liquidity and ability to cover immediate expenses. An organization might show a surplus on the statement of activities but still face cash shortages if revenue is recorded before actual payment arrives.

Directors need both statements to understand the complete financial picture.

How to Interpret and Analyze Nonprofit Cash Flows

The nonprofit statement of cash flows reveals how money actually moves through an organization, broken into three distinct categories. Directors who understand these sections can spot cash shortages before they become critical and make better decisions about spending and investments.

Operating Activities

Cash flows from operating activities show money moving in and out during normal daily operations. This section starts with net income from the accrual basis accounting used in the income statement, then adjusts it back to actual cash movements.

Directors add back non-cash transactions like depreciation because these reduce net income without any money leaving the bank. A decrease in accounts receivable gets added because it means donors paid their bills and cash came in.

Increases in accounts payable also get added since the organization hasn't paid those bills yet. The section subtracts gains on asset sales, increases in current assets, and decreases in current liabilities.

These adjustments convert accrual-based net income into real cash flow. A positive number here signals healthy operations.

Negative cash flows from operating activities warn that the organization spends more cash than it brings in through its core mission work.

Investing Activities

Cash flows from investing activities track money spent on or received from long-term assets. Buying new equipment, computers, or buildings appears as cash going out.

Selling property or investments shows cash coming in. This section typically shows negative numbers for growing organizations that invest in their future.

A charity buying a new building will show large cash outflows here even though the purchase strengthens the organization's position. Directors should watch for major purchases and confirm they align with strategic goals.

Large unexpected outflows might signal poor planning or unauthorized spending.

Financing Activities

Cash flows from financing activities cover how the organization funds itself through loans and long-term financing arrangements. Taking out a loan brings cash in, while making loan payments sends cash out.

This section also includes changes in restricted net assets that function like financing. When a donor provides funds restricted for building a new facility, it appears here rather than in operating activities.

Directors should monitor this section to track debt levels and major restricted donations. High outflows from loan repayments might strain cash reserves if not balanced by strong operating cash flows.

Differentiating Restricted and Unrestricted Cash Flows

Restricted funds can only be used for specific purposes set by donors, while unrestricted funds support any legitimate organizational need. The statement of cash flows doesn't always separate these clearly, which creates interpretation challenges.

A charity might show positive total cash flows but struggle to pay bills if most incoming cash sits in restricted net assets. Directors must look beyond the ending cash balance to understand how much money they can actually access.

Organizations should track restricted and unrestricted cash separately in internal reports. This practice prevents spending restricted funds on general operations and helps directors see the true available cash position for day-to-day needs.

Assessing Financial Health: Cash Flow Metrics and Asset Management

Charity directors must track specific financial indicators to understand their organization's true position. Strong asset holdings can mask cash shortages, while healthy cash flow may coexist with insufficient reserves for future needs.

Evaluating Liquidity and Solvency

Liquidity measures a charity's ability to pay current liabilities within the next 12 months. The working capital ratio compares current assets to current liabilities and should exceed 1:1 for basic financial stability.

Most experts recommend a ratio between 1.5 and 2.0 for nonprofits. The current ratio calculation divides total current assets by total current liabilities.

A charity with $150,000 in current assets and $100,000 in current liabilities has a current ratio of 1.5. This means $1.50 exists for every $1.00 of short-term debt.

Days cash on hand reveals how long a charity can operate using only existing cash reserves. Calculate this by dividing unrestricted cash by average daily operating expenses.

A minimum of 90 days provides reasonable security for most organizations. Solvency examines long-term financial viability beyond immediate obligations.

Directors should review both short-term and long-term liabilities when assessing overall financial health. High long-term debt relative to assets signals potential sustainability issues.

Net Assets and Reserves

Operating reserves serve as a financial cushion during revenue shortfalls or unexpected expenses. Most financial advisors recommend that charities maintain reserves equal to three to six months of operating expenses.

These reserve funds should remain in liquid or near-liquid form. Net assets appear on the balance sheet as the difference between total assets and total liabilities.

Charities classify net assets into categories: unrestricted, internally restricted (set aside by the board for specific purposes), and externally restricted (designated by donors). Endowments represent permanently restricted funds where only the investment income can be used. Only unrestricted net assets provide true operational flexibility.

Directors should establish clear policies for building and using operating reserves. The policy must define target reserve levels, acceptable uses, and replenishment requirements.

Board-approved reserve policies demonstrate financial responsibility to donors and funders. Reserve adequacy depends on the charity's revenue stability and operational risks.

Organizations with diverse funding streams may operate safely with lower reserves. Those relying heavily on one or two sources need larger cushions.

Monitoring and Reporting

Monthly financial reports allow directors to spot problems early and make timely corrections. These reports should include cash flow statements, budget-to-actual comparisons, and key ratio calculations.

Directors need reports within 15 days of month-end to maintain relevance. The treasurer reports financial position and significant changes to the full board at each meeting.

Effective reports highlight variances from budget, explain unusual transactions, and flag emerging concerns. Visual elements like charts and graphs improve comprehension.

Annual reports provide comprehensive financial disclosure to stakeholders. These documents typically include audited financial statements, notes explaining accounting policies, and narrative descriptions of financial results.

Transparency builds trust with donors and regulatory bodies. Audited financial statements offer independent verification of reported figures.

Charities meeting certain revenue thresholds must complete annual audits. The audit process examines internal controls, tests transactions, and confirms asset existence.

Common Cash Flow Challenges

Timing gaps between grant approvals and actual payment create cash shortages even when total revenue appears adequate.

Multi-year grants with annual disbursements require careful planning to match expenses with incoming funds.

Directors should maintain a 12-month rolling cash forecast.

Restricted donations solve one problem while creating another.

These funds increase total assets but cannot address general operating needs.

A charity may hold substantial restricted assets yet struggle to pay basic bills.

Seasonal revenue patterns affect many charities, especially those dependent on year-end giving or special events.

Budgeting must account for these fluctuations by building reserves during high-revenue periods.

Lines of credit can bridge temporary shortfalls.

Late donor payments and delayed receivables directly impact available cash.

Days sales outstanding tracks how quickly the organization collects pledged donations.

Accounts receivable aging reports identify overdue commitments requiring follow-up.

Practical Cash Flow Management for Charity Directors

Charity directors must monitor when money actually enters and leaves the organization, not just track pledged amounts or owned assets.

Effective cash flow management requires accurate forecasting of incoming donations and grants, strategic allocation of available funds, and careful handling of restricted contributions.

Budgeting and Forecasting Cash Needs

Directors should create monthly cash flow projections that map out expected inflows from donations, grants, fundraising expenses, program service fees, and sponsorships.

These projections need to account for timing differences between when funds are promised and when they arrive in the bank account.

Historical data provides a reliable foundation for forecasting.

Directors can review past years to identify seasonal patterns in donations and grant disbursements.

Foundation grants often follow specific payment schedules, while individual donations may spike during year-end campaigns.

The budget should separate restricted and unrestricted funds from the start.

This prevents directors from planning to spend money that donors have designated for specific purposes.

Monthly reviews of actual cash position against projections help identify shortfalls early enough to take corrective action.

Building a cash reserve of three to six months of operating expenses protects against unexpected delays in funding.

This buffer allows the charity to continue operations when grant payments arrive late or fundraising campaigns underperform.

Best Practices in Fund Allocation

Fund allocation decisions must prioritize obligations the charity has already committed to paying.

Payroll, rent, and essential program costs come first.

Directors should avoid overcommitting funds based on pledges that haven't yet converted to cash.

Creating spending categories helps track where money goes:

• Program delivery costs (direct service provision)
• Administrative overhead (operational necessities)
• Fundraising expenses (donor acquisition and retention)
• Reserve building (financial stability)

Directors should establish approval thresholds for different spending levels.

Small purchases might need only one signature, while larger expenditures require board approval.

This protects the organization from unauthorized spending that could create cash flow problems.

Payment timing matters as much as payment amounts.

Negotiating extended payment terms with suppliers can ease cash flow pressure during slow periods.

Managing Donor Restrictions and Pledges

Donor restrictions legally bind how charities can use certain funds.

Directors must track restricted donations separately from unrestricted funds to maintain compliance.

A donation marked for youth programs cannot cover administrative costs, even temporarily.

The Legal Risk: Breach of Trust

Using restricted funds for purposes other than those specified by the donor isn't just poor accounting practice—it constitutes a breach of trust under Canadian law. When a charity accepts restricted donations (such as funds designated for a building project), those funds are held in trust for that specific purpose.

"Borrowing" from restricted funds to cover operational expenses like payroll—even temporarily—violates this trust relationship. Such actions can result in:

• Loss of charitable status
• Personal liability for directors
• Lawsuits from donors for misuse of funds
• CRA penalties for misrepresentation

The CRA considers misuse of restricted funds a form of fundraising misrepresentation. Directors who authorize such transfers, even during cash flow emergencies, can face serious legal consequences.

Source: CRA: Fundraising Guidance

Directors must ensure the organization maintains sufficient unrestricted cash reserves to avoid the temptation to misuse restricted funds during cash shortages.

Pledge management requires realistic assumptions about collection rates.

Not all pledges convert to actual donations.

Directors should use conservative estimates when including pledges in cash flow projections—typically 80-90% of pledged amounts from established donors.

Multi-year foundation grants need careful tracking across fiscal periods.

Directors should record only the current year's instalment as available cash, not the full grant amount.

This prevents overspending based on future payments that haven't arrived.

Donor management systems help track restriction details and pledge status.

These tools send reminders when pledges are due and flag restricted funds before they're accidentally misallocated.

Regular communication with major donors about their giving timelines improves cash flow forecasting accuracy.

Best Practices for Transparency and Accountability in Financial Reporting

Charity directors must implement clear financial reporting practices that satisfy regulatory requirements and build donor trust.

Strong transparency practices include timely filing of required forms, open communication about financial health with stakeholders, and accurate classification of all cash movements and assets.

Regulatory Compliance and Filing Requirements

Canadian charities must file Form T3010 (Registered Charity Information Return) with the Canada Revenue Agency annually. Under the Income Tax Act, this return must be filed within six months of the charity's fiscal year-end. Failure to file can result in loss of charitable status.

Many organizations also need to submit audited financial statements depending on their jurisdiction and revenue size.

Provincial Audit Requirements

For charities incorporated under the Ontario Not-for-Profit Corporations Act (ONCA), an audit is required if annual revenue is $100,000 or more. However, if revenue is between $100,000 and $500,000, members may pass an extraordinary resolution to dispense with an audit and opt for a review engagement instead. For revenues over $500,000, an audit is mandatory.

In British Columbia, the Societies Act requires "reporting societies" (those that receive significant public funding) to have an audit. The requirement depends on the society's bylaws and whether it meets the definition of a "reporting society," rather than a flat revenue threshold.

Federal Audit Requirements

Charities incorporated under the Canada Not-for-profit Corporations Act (CNCA) have different audit requirements depending on whether they are "soliciting corporations" (those that receive more than $10,000 from sources other than members, directors, and their family members).

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Source: Corporations Canada: Financial Statements and Review

Audit thresholds and requirements vary across provinces, so directors should consult with legal counsel or an accountant familiar with their jurisdiction's specific requirements.

Key filing components include:

• Statement of financial position
• Revenue and expense details
• In-kind donations valuations
• Related party transactions
• Compensation for top employees
• Program service accomplishments

Organizations should maintain detailed records throughout the year to streamline filing.

A fractional nonprofit CFO can help smaller charities manage these requirements without hiring full-time staff.

Improving Transparency with Donors and Stakeholders

Financial transparency builds donor confidence and encourages continued support.

Charities should publish annual reports that explain how funds were used to advance their mission.

These reports work best when they use plain language instead of accounting jargon.

The program efficiency ratio shows what percentage of spending goes directly to programs versus administration and fundraising.

Most donors look for ratios above 75%.

Charities should calculate and share this metric openly.

Effective transparency practices include:

• Posting audited financial statements on the organization's website
• Publishing Form T3010 publicly
• Explaining major financial decisions in newsletters
• Reporting on in-kind donations received and their impact
• Sharing both successes and challenges honestly

Fractional nonprofit CFO services can help organizations develop clear reporting templates.

These professionals understand charity accounting standards and know how to present financial information accessibly.

They ensure reports meet both regulatory standards and donor expectations.

Regular updates matter more than perfect reports.

Quarterly financial summaries help stakeholders track progress throughout the year rather than waiting for annual statements.

Common Pitfalls: Misclassifying and Overlooking Cash Flows

Directors often confuse assets with available cash.

A charity might show substantial assets on its balance sheet while facing cash shortages.

Fixed assets like buildings cannot pay immediate bills.

Common classification errors include:

• Recording restricted funds as unrestricted cash
• Failing to track in-kind donations separately
• Mixing capital campaign funds with operating revenue
• Overlooking delayed grant payments in cash projections
• Misreporting pledges as actual cash received

In-kind donations require special attention.

These contributions must appear in financial statements at fair market value.

However, they provide no actual cash for operations.

A charity receiving donated equipment worth $50,000 must report this value while recognizing it cannot use those funds to pay staff.

Restricted donations create another challenge.

Donors may give money only for specific programs.

These funds cannot cover general expenses even if cash flow problems arise.

Financial reporting must clearly separate restricted and unrestricted funds.

Jitasa and similar specialized accounting firms help charities avoid these pitfalls.

They provide expertise in charity accounting standards and implement systems that track funds correctly from the start.

Professional support reduces errors that damage stakeholder trust.

Conclusion

Understanding both cash flow and assets gives charity directors the complete picture they need to make sound financial decisions.

Cash flow shows whether the organization can pay its bills today, while assets reveal the organization's overall financial position.

Directors who grasp both concepts can better protect their charity's future and fulfil its mission.

Financial oversight is not just about reviewing numbers on a page.

It requires understanding what those numbers mean for the charity's operations, stability, and long-term goals.

Directors who struggle with these concepts should seek help from professionals who specialize in charity law and governance.

Strong financial literacy at the board level protects donors, staff, and the communities the charity serves.

If you need guidance on financial governance or other charity law matters, contact B.I.G. Charity Law Group.

Our team helps charity directors navigate complex financial and legal requirements.

Call 416-488-5888 or email dov.goldberg@charitylawgroup.ca to discuss your organization's needs.

You can also schedule a FREE consultation or visit CharityLawGroup.ca to learn more about how we support Canadian charities and nonprofits.

Frequently Asked Questions

Directors often have practical questions about managing their charity's finances.

These questions cover reporting requirements, the relationship between different financial metrics, and strategies for maintaining healthy operations.

Does a charity need a cash flow statement?

Yes, a charity needs a cash flow statement.

This document tracks the movement of money in and out of the organization over a specific period.

It shows operating, investing, and financing activities.

The cash flow statement is one of three core financial statements that directors must review.

The other two are the balance sheet and the income statement.

Together, these documents provide a complete picture of the charity's financial health.

Directors have a duty of diligence that requires them to be knowledgeable about the charity's finances.

A cash flow statement helps them understand whether the organization has enough money to meet its obligations.

It also reveals patterns in how funds move through the charity.

What's the difference between cash flow and assets in a charity?

Cash flow refers to the movement of money in and out of the charity.

It shows how much cash the organization receives and spends during a specific period.

Assets are what the charity owns at a particular point in time.

Assets include cash, property, equipment, and investments.

They appear on the balance sheet and represent the organization's resources.

Some assets are liquid, meaning they can quickly convert to cash.

Others, like buildings or specialized equipment, take longer to sell.

A charity can own valuable assets but still face cash shortages.

This happens when most assets are tied up in property or restricted funds.

The cash flow statement shows actual money available for operations, while the balance sheet shows total resources owned.

Why do charity directors need to track cash flow closely?

Directors must track cash flow because it determines whether the charity can pay its bills.

An organization needs sufficient cash to cover expenses like staff salaries, rent, and program costs.

Without positive cash flow, the charity cannot meet these obligations.

Cash flow patterns help directors make informed decisions about programs and operations.

They can see when money typically comes in from donors and grants.

This information allows them to plan spending and avoid cash shortages.

Poor cash flow management can damage the charity's reputation and credibility.

Donors and funders want to support organizations that demonstrate financial stability.

Directors who monitor cash flow can identify problems early and take corrective action.

Can a charity have strong assets but weak cash flow?

Yes, a charity can have strong assets but weak cash flow.

This situation occurs when the organization owns valuable property or equipment but lacks ready cash.

It can also happen when funds are restricted for specific purposes and cannot cover general expenses.

A charity might receive a large grant for a building project while struggling to pay monthly operating costs.

The building increases the charity's assets on the balance sheet.

However, this asset does not help with immediate cash needs for staff or programs.

Timing differences between when money arrives and when expenses are due create cash flow challenges.

A charity may have pledged donations that will arrive later in the year.

These pledges count as assets but do not provide cash for current expenses.

Directors must plan carefully to ensure the organization has enough liquid funds to operate.

How can charities improve cash flow without selling assets?

Charities can diversify their revenue sources to create more stable cash flow.

Relying on a single funding source leaves the organization vulnerable to changes in that stream.

Multiple revenue sources provide more consistent income throughout the year.

Building relationships with donors helps create reliable funding patterns.

Regular communication keeps supporters engaged and informed about the charity's work.

Monthly giving programs provide predictable cash flow instead of one-time donations.

Effective expense management also improves cash flow.

Directors can review spending priorities and eliminate unnecessary costs.

Negotiating better terms with vendors may allow the charity to delay payments or secure discounts.

Creating a cash reserve for emergencies provides a buffer during slow funding periods.

Can the allocation of assets affect a charity's ability to deliver on its mission, and if so, how?

Yes, asset allocation directly affects a charity's ability to fulfil its mission.

When too many resources are tied up in non-liquid assets, the organization may lack cash for programs and services.

This can force the charity to reduce activities or delay important projects.

Restricted assets present particular challenges for mission delivery.

Funds designated for specific purposes cannot be used for other needs, even urgent ones.

A charity might have substantial restricted assets while struggling to pay for essential operations.

Directors must balance long-term asset growth with current program needs.

Investing heavily in property or equipment can limit funds available for direct services.

The charity's financial statements show both what the organization owns and what it can actually use for its work.

Directors need to ensure asset allocation supports the mission rather than hinders it.