A Not-for-Profit Financial System
with Steve Merager

Steve Merager has twenty-eight years in the financial services industry and now provides sophisticated services to small- and medium-sized businesses as a fractional CFO.

Steve has managed the budget of a nine billion dollar bond project, was the lead financial manager of the pilot program for what is now the country’s largest student loan program, regularly helps businesses with their pre-IPO requirements, finds profit opportunities for clients and helps organizations find solid ground for their work.

Steve believes that true clarity for a business leader happens when a company’s books tell the same story in numbers that the leadership tells in words. If there is a divergence between the two, all of the reporting that would otherwise provide guidance instead creates confusion.

Greater profits and peace of mind are available and Merager Financial Solutions is the trusted resource to make that happen.

For more information about Steve Here https://www.meragerfinancialsolutions.com

 

Interview Transcript

Hugh: Welcome to The Nonprofit Exchange. This is Hugh Ballou and Russell Dennis, your hosts, as usual. We have a really good guest today with some secrets on how to install good sound business principles into the nonprofit organization that you lead. Russ, how are you doing today?

Russell Dennis: It’s another fine day here in Colorado. A little bit chilly. I have my great colleague here, a man with a warm heart. Steve Merager. He is here to share how to put your nonprofit on track to success by having the right systems. Works with business leaders all over the area. I was pleased to be able to find some time in his schedule for him to come join us. I’m looking forward to talking with him so he can tell us about how you can make your systems more effective.

Hugh: What I know is if Russell brings someone to the table, they are very competent. Steve, welcome to The Nonprofit Exchange. Tell people about yourself and why you’re doing what you do.

Steve Merager: Thank you so much. I’m happy to be here. I have 30 years of experience in all areas of finance. That includes everything from working with universities to being a consultant internationally. I have worked in finance for most of that time as well as IT. What happened was about four years ago, I decided that I needed to give more. I had a lot to give to outside of corporations. I quit that lucrative job and decided to help smaller businesses. I leveraged all of the work that I did, including being a budget lead for a $9 billion bond project and heading up the Federal Direct Loan Program implementation in its first year, using that type of skill in the for-profit world and picking best practices available to every organization. I let small and medium-sized businesses leverage what I can do with my business. These last four years have been thrilling. I have done all kinds of work, everything from going into nonprofits. One board asked me to go in and audit their books, see what had happened in the last year or so. It was good for that organization to get that type of information from a non-biased third party who could provide a deep report back to them as to what had happened. I have been the treasurer for several nonprofits. There are best practices. Nonprofits is a different world. As I think it should be in all organizations, the volunteers and people outside of the organization are so important. It’s important to keep those individuals happy. It should be done everywhere. The people doing the work are critical to make any organization run. That’s where I am. It’s such a thrill to help organizations get to that next level, whatever that is they need. Setting up an internal organization, the great thing about it is it can be sustainable, long-term. People are happy working within that financial organization. That is one of the key theses.

Hugh: Great. Thank you for being here. Russell has spent some time with you, and he has formulated some good questions. Let’s have him get started.

Russell: Thanks. Steve, we talk a lot about relationships and working with different audiences that a nonprofit has. What are some critical questions that the internal team need to ask themselves to be effective?

Steve: First of all, one of my first priorities is to make sure that any decisions that are made have been fully documented. What that means is there is a clear definition of how decisions are made. Sometimes that can be delegated to a treasurer. It starts with a board. They are the ones with the overall fiduciary duty. It starts with that. It starts with procedures to make sure that the same thing is done, consistency. With every organization I have helped, I’ve given assurances the organization would be bulletproof with an audit. That is incredibly critical. It’s a good measurement to ensure that things are being done correctly. Within organizations, there is political stuff, how people are working with each other. Are there any roadblocks to decisions being made? There is also a budget, which is a critical piece. That is a really important planning tool that can be used. Perhaps we can get into that later. That is one thing where a budget being a living document is reviewed every month, maybe every quarter. It provides a realistic way for the organization to see itself, where all of its resources are. The volunteer leads are the most important resources. With almost every aspect of any organization, money somehow comes into play. We want to make sure that it’s almost transparent. It’s not a concern. It’s just something that is taken care of. It’s there to serve the organization. The money side of the organization gets out of the way of the primary mission of the organization.

Russell: There are a lot of questions. In order to be effective, nonprofits have to connect with people outside of the organization. Who would you say are some of the most critical partners that a nonprofit organization would have? Why are these people important?

Steve: There are best practices. But that can become a complex thing. The complexities of how do we implement this best practice. What does it mean in this scenario? What is the context behind it? One of the best resources are other nonprofit treasurers, or CFOs, whomever the financial person is. Get a high-end discussion of what is going on. Get some information, some opinions about how they think it could be handled.

Another one is the organization’s CPA, the individual who does the taxes at the end of the year. That person, the tax individuals, they typically are not necessarily operations people. But they can provide some information, especially I’ve had to push back at times when someone was considering something, because the organization needs to know if it was risky, or if there is a better way to do it. The intent of most boards is good, so we want to make sure that that’s done correctly. Sometimes we can reach out to the IRS. Take it with a grain of salt. But they can be helpful. There are things that we could do possibly like vendors helping us. They can structure their billing in a different way. There are several ways they can help us out. There is also donors or representatives from donors or from the community. People who are tied into the community of donors or volunteers. They can really provide some additional information about what’s going on outside of the organization that can make decisions easier internally and more palatable for the constituents once they are put out there. Arguably, one of the difficult ways to lead is to lead from on top. You got to get buy-in from people. A good way to do that is talk with them first and see what they think.

There is also people within the organization itself. They don’t have to be outside the organization to have incredibly valuable input.

Russell: One of the benefits that people get from talking to you is they find out whether their organization is healthy or not. In a nonprofit, you have all of these leadership roles. You have board members. What are some of the things that the board should focus on as far as goals for making sure the organization is healthy? What do those key leaders on the board have to accomplish in order to make sure the nonprofit is healthy?

Steve: It can take some introspection. Especially the lead person, the chairman of the board, what is best for the organization, how can we make that happen, what lines of communication can we open. It’s really a sensibility of going back and making sure that the things that have been implemented continue to be correct, continue to focus the organization with the vision that has been put forth, agreed to. That can fall outside the financial side of it. But the financials typically affect almost everything.

A budget is a great way to determine what the priorities are for an organization. There is nothing like sitting down and having a discussion about the resources. With a positive discussion, since you have limited resources, it then becomes obvious what things should be funded. That budgeting process can really focus and take that vision that can be idealistic or amorphous and focus things down to- I’ve worked with organizations with questions about infrastructure. Should we spend 20% of our budget this year on infrastructure so we don’t have to keep renting items? Where are we? What kind of organization- How do we see ourselves in five years? Some of those questions, and somebody that is a really thoughtful financial leader will ask these questions. Does this continue to make sense?

There is a point with almost any organization where it goes from that garage mentality to a real organization that is going to continue to offer these services. We are going to be in business for indefinitely. That is the point. There is a critical point at which the organization flips in a certain great way to thinking, to knowing that they are viable continuously. It’s a beautiful thing to witness. When you see leadership saying, Yes, we should do that because that is going to affect this organization 20 years from now. The budget is certainly a key part of that.

Russell: There are a lot of critical players in the organization. You painted a great picture overall. Could you talk about some of these people who are critical in decision-making and making sure that the organization stays on track? Some of the specific people who are critical to that process.

Steve: It all starts with the board. A healthy board is one that is concerned about policy. It’s setting policy. It is providing the resources and delegating the responsibility to leads within the organization to implement those policies. That is a critical piece of it.

Within the organization, there can be any number of things. It depends on how well funded it could be, if it’s staff helping out, or if it’s volunteers. But it can have limitations. If you have a bookkeeper, you probably want if possible a budget lead, sometimes an assistant treasurer, someone who is doing some of the more short-term oversight. Maybe doing a monthly budget. Seeing where that all ties together. Doing things like allowing people to have debit cards so that they can be empowered to go out and buy things, whomever needs to, getting the financial side out of the way of the organization doing the things.

There is also something that I have advocated typically with most organizations. That is a finance committee. In the simplest way, it’s bringing together the people that have different ways of looking at the organization. That would be the treasurer because that is the person who is inside the financials. But also somebody from the board, so they have an independent idea of the board is thinking about doing things I talked about before. Perhaps somebody from the community, some other constituency. You have these different needs being expressed by people in the same room.

One of the beautiful things about a finance committee is that the budget lead can go through the budget process, talk to all the leads, and then the first discussion can be with the finance committee. The finance committee can greenlight- The way I advocate doing budgets is by line item. It’s not a dollar amount, but what you will specifically need. Maybe there is a music festival that needs to build a stage. They need 50 sheets of plywood. They will put the 50 sheets of plywood and the dollar amount for each piece. The finance committee is going to take each line item, hundreds sometimes, and greenlight as many as they can, and also yellow flag them as ok for the board to look at, and then red flag those that are questionable that they are recommending not to do. These are all recommendations to the board. It shortens the lifespan and simplifies the budgeting process. The board then gets this budget, and they can go through and agree or disagree. A good discussion happens.

That’s the finance committee. Also one thing that is helpful, especially with some newer organizations, is the finance committee gets a budget as well. What this means is that 1-2% of the overall budget, it’s discretionary. The organization has an event. That is one of their key things. There is so much happening. Somebody needs another 50 pieces of plywood. Instead of going in front of the board, the finance committee can come together and allocate some of their budget to the department so it doesn’t slow things down. That is the finance committee.

You might want to have committees for different events. Something that is a smaller piece of the entire organization. That is also a good group to look at. Also, some past leadership.

Russell: Money is a very important thing for any organization. You talk about having a finance committee to help with that. What are some of the key questions that every organization should ask as they are building a financial structure?

Steve: That’s a good question. The first one is how does it serve the mission of the organization? It should be light. It should be easily usable. It shouldn’t slow things down unnecessarily. There is a balance point. You can look at it from both sides. You can have an organization where it’s fast and loose. Buy what you need, and get the receipts in. You have $1,000. Go for it. We will collect the receipts at the end. That’s great in the sense that things will get done immediately. It’s not great because once people get something, whatever it is they need, you won’t get all of those receipts. My intention as I said before with any nonprofit is to be bulletproof in an audit. The perfect way not to be bulletproof is to let people spend money before you get the receipts.

One thing I did that worked out well with one organization is a lot of people needed things from Home Depot. They would have a budget. It’s tricky to give money out, to have access to money. They set up a shopping cart with authentication. I would go in and pay it or have the assistant treasurer pay it. We made sure we had the receipts, and everything was all sewn up right there.

The fast and loose side. Give out the money. You won’t be bulletproof.

The other way to do it is lock things down and make people jump through hoops. It can slow down the process. Perhaps more importantly it can make it such that volunteers get frustrated. You can easily lose volunteers by having a financial structure that feels restrictive and like they are not trusted. There is a good balance point with that.

Transparency is certainly something that makes up a good system. Everyone knows what’s going on. If there are questions, they can be easily answered. One thing I do typically is I set up free QuickBooks report access to anyone. It’s unlimited. If someone has access to the reports of everything in the system, they know what’s going on. They know there is no funny business. There are no questions of impropriety. Removing any question of impropriety is incredibly critical so that there is trust. Whenever there is money involved, people rightly so want things to be correct. Any opportunity to make that trust obvious and explicit is incredibly important. QuickBooks is a good option for most small businesses. It will automatically email reports to you up to every day if you want.

Your question being good things to set up an organization. Making sure that there is an accounting system. One that is robust, one that can grow. Something that is a critical question point is what accounting system do you want to implement. You can get cheap. It’s going to be great until it’s not great. Transferring it over to another system will be almost impossible, if I’m being honest. So you will have to start over. *Video glitch*

Russell: The first thing that I would do is I would go in and ask for corporate minutes and books for the report I put together. I would ask for policies, particularly fiscal policies because as an auditor, the first thing that you have to do is get an idea of how things are framed. Is there a risk to how resources are handled here? You have to assess whether there is risk around it based on the policies. Can you speak as to how that contributes to the financial health of the organization?

Steve: Absolutely. The policies are critical. We talked about that earlier. It’s one of those things where you want consistency. As you know as an auditor, an auditor comes in and asks these questions. Maybe they look at another disbursement. We did it this way which is not the same thing as the first way. Any auditor would wonder what is happening here. Now you will need to show me everything. If you are not doing something consistently, it’s correct that they do that because something will break otherwise. It’s almost not possible to have the same result doing it multiple ways. Having those procedures signed off by the board (if possible) – I would certainly recommend that – they should be as detailed as possible. They should have information about the systems that are being used. Maybe not down to the level of actual functionality, how a bookkeeper would open up a screen. It’s not speaking to that. It’s speaking to how it’s done in the larger sense so that it could be tracked. I think if someone could take the idea if I’m not around anymore, however that happens, and someone looks at this transaction, they can see why we did it. It’s business continuity. Get hit by a bus. The lead person gets hit by a bus. It should not matter that that person is no longer there. Their results should speak for themselves, and they should be obvious. Having a written procedure is the clear way to do that.

Hugh: There are some other reasons around that, too, Steve. Accountability. I’ve heard stories about money disappearing. Having some real good accounting that a person requests a payment is not the same person who approves the payment is not the same person who writes the check. There is an educational piece of educating board members of their fiduciary responsibilities. There is connectivity there, isn’t there?

Steve: Absolutely. Each one is critically important. depending on how that works out, the treasurer can see where the board is and provide input and some training. You don’t want someone who is approving a payment to be disbursing the payment. That should never happen. If that is happening, that is a huge red flag for any auditor and for the organization. There should be the separation of power, as you mentioned, that nobody can both approve a payment and disburse it.

All of these things keep the organization’s funds safe from misuse. Another thing that should be done with any organization is the finances should be reviewed by someone outside the financial group every year. They should look at every transaction. Take a sampling within them and see how they were done. I am not speaking of a CPA audit. This is being reviewed independently from the financial team. Maybe someone from the board. It could be paid for. It will cost a few thousand to have a CPA do it. But that is also a good idea. Depending on the amount of money an organization has made, it is a requirement. But there are cut-offs to that, actually having what is called a review by a CPA and an audit. A review is a lesser overview, and the audit is in-depth.

Hugh: We have a question from a viewer. He is in a different country; he is in California. I think you have answered this. What would be a procedure example? Mark, if you have another question. Do they have to be on the ground in the office? Oh, he is in Peru. He is in another country. I thought I was being funny. I thought I was wrong, but I was mistaken.

Russell: He is asking about the auditor, if that person needs to be in the office.

Hugh: He moved to Peru to start a charity there. Mark, if we’re not addressing your question, ask it again. He is talking about the auditor, if they have to be on the ground in the office.

Steve: Most of the time now, organizations have digital records. I certainly try to move all clients to digital records, Dropbox or Google Docs or Google Drive. QuickBooks Online. They can be accessed from anywhere in the world. Therefore, if everything is available, it doesn’t matter where the person is. They don’t have to come in. It can be better to have the arms’ length review so the person isn’t in the office. Of course, if you have a file cabinet and are keeping paper, someone must come in to do that and it will be much more expensive. I see you want some examples. An auditor will come in and say, “I want all the back-up for these 10 disbursements.” However that is, whether it’s digital or paper, they will sit down and want the disbursement procedure. They will review what was supposed to happen and what did happen. They will look at the disbursement and everything behind it. See how it lines up with the procedure. It will get a pass, question mark, or not pass. With all 10 of those, they should pass. Russ is nodding. I can see that. All of them should follow the same procedure. If they don’t, the organization is typically asked for more disbursements to review. There might be a finding.

It doesn’t have to happen in an office. It typically happens these days virtually.

Russell: As I finished up my days with the IRS, we were starting to move into the realm of requesting records electronically. As you can imagine, the paper pile was insane. What an auditor will typically do is they want to understand your electronic accounting system. They will typically ask for a full back-up of the system and the access to that because they would be able to move around in a system and do different tests within that system and understand a bit about how it works. As far as citing, when I was working with specific agencies, we took care of everything. Our accountants for one organization were right there in town. I did do some work for Child Development Services, which was a state-wide agency. They didn’t have people on the ground locally. They would come up once a year. We would share information electronically. They would come in and look at the physical records once a year when they were doing the CPA audit. It’s really a question of how healthy you want to be. They look at things like your internal controls, which determines who handles money, who disburses it, what authorizations you need for purchases. An example of that would be for purchases when I was working with the Mick-Mack tribal government. I needed to complete a purchase order and submit it. Then we would have the disbursement. There is a paper trail. All of our transactions operated in that way so there was a paper trail, and it went in electronically. Your auditors will look at your internal controls and your other policies. That will determine that level of risk and how many transactions they have to look at to see if you are healthy.

Steve: I saw Mark’s question about examples. An easy way to make sure you get all the documentation is have each person send a singular email, depending on what the subject is. They can attach a copy of their budget for the year, the receipts, and sometimes if there were a lot of things, a Google doc that would add together how much they have spent. If it’s all together, then you know 100% that that disbursement has been spent correctly. There are some easy ways to do it.

I have worked with organizations where there was a fast and loose way, where they exchanged checks for receipts. There would be some pushback. But after a while, my experience has been people start to appreciate that because they know things are being taken care of. Most people have access to email. Most people have access to a Smartphone. Take a picture of the receipt, and forward it. It’s relatively straightforward.

Hugh: Steve, another accountability thing we stress at SynerVision is the integration of strategy and performance. A lot of our organizations don’t spend time to create a strategic plan, a road map for where they’re going. It’s an engagement tool. The other part of it is the financial planning tool. You can’t effectively do a budget until you know what the milestones are going to cost. Then there is also a spending plan and a fundraising plan. Talk a minute about that integration. If you spend a dollar, you need to have a chart of accounts that says this is what it’s paying for, and that needs to be on your strategy. Talk about that accountability piece.

Steve: That’s complex. It really gets into deep oversight. Organizations have spending based on the administrative and other things. Making sure that that’s integrated so not all our organizations have donor outreach. It could be mixed. It’s long-term, what does that look like? What are the needs of the organization? What are the expenses going forward? When you have directed donations, you can only spend them on certain things. You have to make sure within the accounting system they are marked for specific projects, or whatever that specific thing is. The budgets can be created, and the cash projections can be created, so that you need to get some more donors in. Maybe you need to sell more tickets, whatever it might be. Maybe you get a separate fundraising effort individually. Those things can be broken out so you can be laser-focused on, especially if the organization is thinking about multiple needs, multiple strategies, multiple projects being done within a given year. That does need to be put together in a system such that those reports can come out. We talked earlier about having spreadsheets. That is precisely where a spreadsheet would be brutal. I am an expert with spreadsheets. I wouldn’t be very certain with a spreadsheet to track something like that. An accounting system like QuickBooks, they have that. That can be tracked. The reports can be sent off to the board.

Hugh: Think of a typical church. You have a youth program with deliverables with certain projects and a budget. There is a cap on where they could spend. The youth director makes a request to the treasurer, the treasurer approves it, and someone signs the check. You have that triad. The person requesting it does not approve it. Someone needs to approve it, it’s in the budget, here’s the line item, the integrity. The money is there; we will write the check. You have missions. You have the music ministry. You have these different programs under the single umbrella. Symphony Orchestra has concerts. Organizations have different projects they work on. Each one has a sub-budget underneath the organization’s budget. We have sheet music. We hire performers. We do publicity. Those are line items in the budget. In the aggregate, we can’t go over a certain amount. There is a responsibility to live within that. If we’re doing it, is it in our plan? We don’t spend money just because we want to. We spend money because we’re tied in to what we said we’re going to do in our plan. That’s where I was headed with that.

Steve: The ad hoc request for things should never happen. An orchestra, someone needs a new instrument. Of course. There are ad hoc things where there needs to be flexibility. There should be a discussion well before the fiscal year started. Whomever is leading it should have asked each person how their instruments are. Do you have seats that are correct? Do you have the music stands? There should be complete awareness of everything that may be needed. It should be, “My trombone has another five years on it.” You talk about long-term planning. That should be part of it. We need to replace this trombone in five years. When you are going out that far, you can do things like setting aside the money. You will be depreciating these things, setting them aside. When those five years come up, it’s not like, “Oh no, we need to replace all the trombones now.” We knew that. It was in the plan. That’s part of what we’re going to do.

Go back to any other infrastructure. I worked with some organizations where you have some really expensive equipment. Yes, it will need to be replaced. That is part of the planning. It’s full awareness of what’s happening financially. And the risks. Each one of those are possibly a risk. I worked with one that stored everything between events in a trailer. That was a massive risk. We had to insure that trailer for everything inside of it. There had to be some plan, worse case scenario happens, to make sure that the organization can continue on. It would be a lot of work to do to replace that level of loss. But still, there should be a plan with everything. Good news, bad news. You have something, so you have it. You need to maintain it or replace it at some point. Every one of those material items should have a plan behind it.

Hugh: That’s part of your strategy. The pipe organ, painting, roof, air conditioner. For a church, those would be major expenditures. Air conditioners go for 20 years. You put away some in an account. That’s assuming we’re not going hand to mouth, and we have a successful financial plan, and we thought about the future. If you worked with a nonprofit, why would people need someone like you as an outside presence? There is outside accountability. There are tools you bring. What are some other reasons someone would need a Steve to be part of their extended team?

Steve: Everybody needs a Steve. Should be my new tagline. If an organization has been going for some amount of time, there is going to be inertia of how it’s been done. That can serve an organization really well, or it can cripple it. I think so much of life is about awareness outside of the things we do in business. What are you aware of? I’ll ask some questions that may have never been asked before in that organization. Why are you doing this? Why are you spending money for this? Is this something? Do you have a plan? Is this a fear that the church is going to burn down? Why are we doing this? It’s not only that, but it’s things like making sure that things are documented. It’s going through and doing the budgeting.

Some of these lead things that are happening, it’s also oversight for the bookkeeper. A bookkeeper is brilliant. They are doing the critical work of the organization. They may not be doing it with the access to what the strategy of the organization is. There may be a long-term vision of what the organization is doing. And the bookkeeper isn’t in those meetings. A bookkeeper’s specialties are not typically strategy or long-term thinking. That type of oversight, making sure that when the reports come out, the leadership is getting a good review of it so they know what they mean. The reports come out. A lot of people look at all of these numbers, and their eyes glaze over. A good financial leader can say that those financials are a story told in numbers. Every one of those numbers has a human set of decisions and actions behind it. There is some of the long-term planning. There is oversight to make sure that the regulations are being met. It’s doing things like making sure that the financials are ready for tax time. It’s doing things like making sure that the cumbersome things- I’ve seen where things that have not been properly coded or kept in the books, the can is kicked down the road year after year after year. The books need to be as clean as possible.

Oversight of the whole system because they’re outside organizations that do a calculation of how efficient the organization was in spending money for what the organization is chartered to do against how much they spent with administration. Raising alarm to the board to say, “This is getting crazy. We’re spending a lot of money.” This is a massive risk out there. When our donors see we are spending whatever that dangerous place is, we may lose donations. There is the bigger picture. The way that the organization is both in the world and internally, how it’s being run inside. It can also do things such as mentoring people that are doing roles within the organization. There are tons of ways to do things. What’s the best way for the organization? The way it’s been done for years is not necessarily what is best right now. It is someone that is new to the organization and can lend a different set of eyes to how the organization is running.

Hugh: A different set of educated eyes. It’s been almost an hour now. It’s good stuff, Steve.

*Sponsor message from SynerVision Leadership Foundation*

Steve: The financial side can really be an incredibly positive thing within the organization. It can feed the things that it needs to and get out of the way when that needs to happen. My recommendation is that there is an overarching view on the organization from a financial point of view. Everything is as standardized as possible and as expected as possible. I encourage you, if you do one thing, to create a budget. At a minimum, you’re going to have a broad discussion about your entire organization and everything that the money touches. I wish everybody that sees this the absolute best luck. Very happy to be here.

Russell: Thank you, Steve. It’s been a remarkable hour. It’s gone by so fast. It’s enough to make your head swim. This is a subject near and dear to a lot of people’s hearts. Maybe not so good, depending on your point of view. Money can really get people stirred up in organizations. As nonprofit leaders, it’s important to be good stewards.

At SynerVision, we talk about having the right people on the bus. When you talk about handling money, you have to have the right people on the bus.