Living on the Edge with Chip Ingram

If revenues are greater than expenses within a year, the organization has generated a surplus. If expenses are greater than revenue, the organization experiences a deficit for the period. There is no rule that says organizations should have surpluses, deficits, or break even. Typically nonprofits budget to break even. However, organization may deliberately decide to spend down their cash reserves (expendable net assets) for a specific purpose such as starting a new program. Doing so may result in an operating deficit, but one which is planned. Similarly, if a nonprofit has determined that it needs a cash reserve for specific future purposes (cash flow, investing in a new program guarding against future declines in funding, etc.), the financial statements may reflect an operating surplus.

Simply stated, net assets are the excess or deficiency of assets over liabilities.
To ensure long-term organizational and operating stability, it is generally wise to have a significant net assets balance. Building a net assets balance occurs by operating with revenues in excess of expenses.
To determine the adequacy or inadequacy of the net asset balance, one should review how this balance is broken down between unrestricted, temporarily restricted, or permanently restricted net assets. Another key consideration is the amount of net property, plant, and equipment included in the unrestricted net assets number.