Understanding an NGO’s Financial Statements: A Breakdown of the Key Components

Ever wondered what’s really happening behind the scenes of the NGOs you support? Glossy brochures and moving stories are great, but the real truth often lies in the numbers. One of the most important ways to understand the inner workings and accountability of such organisations is by reading their audited financial statements. It may seem like a maze of jargon, but it actually provides powerful insights into how an NGO operates, how donations are utilized, and whether the organization is truly walking the talk.

Different Hats NGOs Wear – Legal Structures:

Don’t worry, we have broken it all down in simple terms, helping you understand how to read NGO financial statements to make informed donation decisions. Let’s dive in.

NGOs in India can be registered under different legal frameworks, each with specific compliance requirements, but with the same overarching objective: serving a public or charitable purpose, not profit-making. Think of it like different types of vehicles that all get you to the same destination of doing social good.

Types of Entities:

• Trusts: Registered under the Indian Trusts Act, 1882, or corresponding state acts, they are managed by a board of trustees. They are usually governed by a deed that outlines the charitable objectives and is relatively simple in structure.
• Societies: Registered under the Societies Registration Act, 1860, these are more democratic and often require periodic elections and AGMs. They usually work with a managing or executive committee.
• Section 8 Companies: Formed under the Companies Act, 2013, these entities are non-profit companies with a more corporate governance structure. They must comply with annual filings and board governance norms, similar to for-profit companies, but do not distribute profits.

Regardless of the structure, each must maintain proper books of accounts and submit audited financial statements to ensure financial transparency and accountability if they are receiving significant donations, grants, or public funds.

Components of Financial Statements:

Financial statements comprise an Income and Expenditure Statement, Balance Sheet, Notes to Accounts, and supporting Schedules. Here is how to read and interpret them:

a) Income and Expenditure Statement: This is equivalent to a Profit & Loss Statement in businesses, but instead of profit, it shows surplus (or deficit). It reflects the NGO’s financial performance over a period of time, usually a financial year.

What to look for:

• Income:
  • Revenue from Operations: This could include grants, donations (domestic and foreign), and the sale of products/services. A diversified income stream from various sources (government, corporations, and individuals) is a sign of sustainability and reduces reliance on a single donor.
  • Interest & Other Income: This can include interest earned on investments.

• Expenses:
  • Program Expenses: These are the costs directly related to carrying out the NGO’s charitable activities. This is the “mission-related” spending.
  • Staff Remuneration & Travel Expenses: Salaries paid to the program staff and the travel/conveyance costs incurred.
  • Administrative and General Expenses: These are the overhead costs necessary for the day-to-day running of the organization, such as salaries of administrative staff, rent, and utilities.
  • Fundraising Expenses: The costs associated with raising funds.

• Surplus or Deficit:
  • Profit/Loss for the period: This shows whether the NGO’s income was more than its expenditure for the year. A surplus is not a “profit” in the commercial sense; it is reinvested into the NGO’s activities. A consistent deficit, however, could indicate financial trouble.

b) The Balance Sheet – A Snapshot of Financial Health: The balance sheet shows what the organisation owns (assets) and owes (liabilities) as of a particular date (usually the last day of the financial year). It also shows accumulated funds, often referred to as the corpus or general fund.

Key Components:

• OWNERS’ FUNDS AND LIABILITIES:
  • Owners’ Funds (Capital/Corpus Fund): This fund represents capital contributed specifically for long-term sustainability, usually through designated donations or founder contributions. A steadily growing corpus fund is a sign of long-term financial strength.
  • Reserves and Surplus: Includes unrestricted general funds built from the accumulated surplus of income over expenditure, as well as restricted project funds and unutilised grant balances.
  • Liabilities: The financial obligations of the NGO.
    • Current Liabilities: Short-term obligations due within a year, like payments to suppliers (Trade Payables) or short-term loans.
    • Non-Current Liabilities: Long-term obligations, such as long-term borrowings.

• ASSETS:
  • Non-Current Assets: Long-term assets that are not easily converted to cash.
    • Property, Plant and Equipment (PPE): Includes land, buildings, vehicles, and equipment used for the NGO’s operations.
    • Non-Current Investments: Investments made for the long term.
  • Current Assets: Assets expected to be converted into cash within a year.
    • Inventories: For example, educational materials or medical supplies.
    • Trade Receivables: Money owed to the NGO, for instance, from grants that have been approved but not yet received.
    • Cash and Bank Balances: The most liquid assets of the NGO.

c) Receipts and Payments Account / Cash Flow Statement: This provides a snapshot of actual cash movements, how much money came in and went out over the financial year. Unlike the income statement, this doesn’t consider accruals.

What this tells you:

• Whether the organisation is managing its cash flow effectively.
• Whether it’s dependent on one-off grants or has a diversified inflow.
• If there are large payments towards administrative or deferred liabilities.

It helps answer: “Is the NGO earning enough money to meet its day-to-day expenses?”

Notes to Accounts & Schedules:

These provide context and clarification behind the numbers. Notes explain accounting policies (e.g., depreciation method), grant treatment, contingent liabilities, related party transactions, etc. Always read these carefully, they often hold the real story behind headline numbers.

Understanding the Auditor’s Opinion:

At the beginning of the report, the Chartered Accountant (CA) provides a formal opinion on whether the NGO financial statements give a “true and fair view”.

Types of Audit Opinions:

• Unqualified Opinion: The best kind – indicates clean books, proper accounting, and gives a “true and fair” view of the NGO’s financial health.
• Qualified Opinion: Indicates that the auditor has some reservations about a specific aspect of the NGO financial statements, but the rest is in order. You can read the “Basis for Qualified Opinion” section to understand the issue.
• Adverse Opinion: A major red flag. It means the NGO financial statements are materially misstated and unreliable.
• Disclaimer of Opinion: The auditor could not obtain sufficient evidence, also a major red flag.

A well-managed NGO should ideally have an unqualified audit report year after year.

Conclusion:

Financial statements are more than just compliance documents — they offer valuable insights into an NGO’s operational effectiveness, resource allocation, and long-term sustainability. Understanding the structure and components of these statements is the first step toward making informed decisions as a donor.

In our next blog, we will go a level deeper. We’ll explore how to interpret the numbers, identify key indicators of financial health, and understand what makes one NGO’s financials more robust than another’s. We’ll also show how HelpYourNGO simplifies this process by standardising financial data, helping you assess and compare NGOs with clarity and confidence. Stay tuned!

Regards
Tushar Hemrajani
Senior Research Analyst, HYNGO