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Plan for Bookkeeping in Your New Business

January 5, 2017 / by Darcie Coy posted in Santa Monica, Los Angeles

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darcie-coy-for-web.jpgEven if your business is profitable, it could still be at risk of failing unexpectedly if you don't track your money properly. And yet every day we see companies launched with little to no budget for professional bookkeeping services.

That's a formula for disaster.

You Don't Get What You Don't Pay For
The reason new businesses skimp on bookkeeping services is simple: They think they're saving money. But just as you can save more than you spend by hiring a professional to prepare your personal income tax returns, you can minimize the "loss" portion of your company's P&L — and maximize the profit — with the help of skilled bookkeepers.

Think about what you have estimated for revenue and make sure your budget for controllership and bookkeeping services is commensurate. If you expect to have a high cash flow, you want to plan for it and not rely on barebones or bootstrap bookkeeping.

Inadequate bookkeeping services can not only eat into your profits, but also lead to significant problems with the IRS. According to Franchise Business Review, "About one in three small businesses will face fines and penalties at some point in their operations due to mistakes, inaccuracies and other errors." And their recommendation for avoiding penalties due to inaccuracy is to hire a professional firm with the skills and experience necessary to handle your business' accounting needs.

Also keep this in mind: If you're crafting a business plan and seeking investors, being thrifty with your controllership and bookkeeping services won't impress them. It will scare them. They'll want to know their investment is well cared for.

Financial Planning Is a Big Part of Business Planning
Besides helping you keep track of your financials, an bookkeeping services company can help you analyze and interpret them, a key component in helping your business grow. You may also need help producing timely, accurate financial reports for investors on a regular recurring basis — usually monthly.

Your bookkeeper should take a holistic approach to your business, understanding not only its current state but also your goals for the future.

You need a bookkeeping services company that can scale with your growth, not stifle it. If you work with a company that has solid processes in place and a large team of qualified professionals, you can minimize the kinds of financial growing pains that can stunt your development.

For more information on this topic, read my blog post from November 2016: Smart Accounting for Start-Up Businesses.

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Legal and Tax Disclaimer
This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal and accounting advisors, and you should consult with a tax, legal or accounting professional before engaging in any transaction.

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Meet the Italian Mathematician Behind Modern-Day Accounting

January 3, 2017 / by Harlan Gleeson posted in Santa Monica, Los Angeles

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Harlan-Gleeson-for-web.jpgItalia. The land that brought us Mediterranean seascapes, the language of love, Michelangelo's "David" and, of course, the origins of keeping good books.

While solid accounting practices date back to ancient Egypt and Mesopotamia, our true Founding Father was, in fact, a Renaissance man: a mathematician named Luca Pacioli. A trusted employee of several successful merchants of Venice, Luca decided he needed a totally new way of accounting that would demonstrate a merchant's performance and the reasons behind his success (or lack thereof).

At the time, the Renaissance elite was developing an appreciation for the practice of algebra and its emphasis on balance. Whatever happens on one side of an equation must be accounted for on the other side.

According to NPR's All Things Considered, Pacioli, who was known to break bread with Leonardo da Vinci, saw in this mathematical thinking a way to appease and impress his high-flying clients. And thus double-entry bookkeeping was born.

While some might call accounting dry, others say the same of a fine chianti (as a compliment). The next time you make an entry in the balance sheet equation, Assets = Liabilities + Owners Equity, remember that the contemporaries of da Vinci recognized the art of accounting as a truly beautiful thing.

(If I've piqued your interest, you can check out our blog for more on balance sheets and P&Ls, trial balance basics and double entry accounting.)

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Why Business Owners Need to Understand Cash Flow Statements

December 28, 2016 / by Ann Willett-Thomas posted in Santa Monica, Los Angeles

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Ann-Willett-Thomas-for-web.jpgI once did the books for a restaurant owner who kept confusing the bottom line of his profit & loss (P&L) statement with his actual cash flow. If he hadn't had someone looking over his shoulder, the results could have been disastrous.

There's a cautionary tale here for all small business owners. Please note: I've provided a simplified example here to illustrate my point.

Another Day Older and Deeper in Debt
To get his business started, the restaurant owner had taken out a business loan. He had also run up a lot of credit card debt early on, charging additional equipment and supplies so as not to burn through the loan too fast. There's nothing wrong with that per se; a lot of small businesses start out in debt.

Even though he no longer used the credit card, the restaurant owner still had to pay down the debt. All told, he was on the hook for about $10,000 a month between the loan and the credit card. Even so, he was keeping his head above water. In an average month, his P&L would show a profit of about $15,000.

That's when the confusion started. Time and again the owner would see that profit and want to write himself a check for, say, $10,000. And time and again I would have to explain that he couldn't do that. That's because the P&L only shows profits or losses for a given month and doesn't factor in any cash used to pay for balance sheet items, like long-term debts. Before he could write himself a check, the restaurant owner needed to subtract $10,000 (for his monthly debt obligation) from the $15,000.

So while his profit for the month was $15,000, his overall positive cash flow was only $5,000.

Getting with the Program
Fortunately for small business owners, accounting software has come a long way since then. (And if you aren't using accounting software, you need to join the 21st century!) Every type of accounting software can generate a cash flow statement. This — not your P&L — is what you should use to gauge the true health of your business.

Basically, the cash flow statement analyzes a handful of vital signs worded something like this, depending on the program:

  1. Net cash provided by operating activities
  2. Net cash used in investing activities
  3. Net cash used in financing activities

To determine cash flow, you start with No. 1 and add 2 and 3 (don't let the negative numbers confuse you — just keep adding them!).

Your cash flow should be a positive number. If it's positive, but still lower than you'd like, you need to do a deeper analysis. If it's negative, you need to address your financial situation immediately.

Our restaurant owner had two basic options for increasing cash flow beyond $5,000 a month:

  1. Increase revenue (difficult, considering he had only one modest-sized restaurant to work with).
  2. Cut expenses (the more practical avenue).

One thing he couldn't afford to do was to run his business as if his long-term debt didn't exist. That's why he needed to focus on his cash flow statement — not his P&L.

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How to Work with Clients in Different Time Zones

December 26, 2016 / by Jennifer Lang posted in Santa Monica, Los Angeles

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jennifer-lang.pngWorking remotely opens a whole network of possibilities. You can collaborate just as effectively with a client who's halfway around the world as one who's right around the corner, provided you account for the difference in your time zones.

All it takes is being flexible with your availability and establishing procedures to avoid communication breakdowns.

What Time Is It? That Depends …
In an increasingly global economy, many U.S. companies have to adjust to doing business 24/7. When it's 9 a.m. in Kokomo, Indiana, it's 7:30 p.m. in Kolkata, India. Three p.m. in Beijing is 2 a.m. in Boston.

Fortunately, most Supporting Strategies clients are stateside, meaning that time differences are fairly minor. Still, you need to be aware of them to avoid miscommunications and missed communications.

You also have to be careful not to inconvenience your client. Say you're in the Central Time Zone and you call an East Coast client at 11 a.m. your time. Well, it's noon at your client's office, so your call could interrupt their lunch hour. Or if you're on the West Coast and you call a client out East at midafternoon your time, they could be preparing to leave for the day.

So that leads to the first rule of communicating with a client in a different time zone: Schedule calls whenever possible. That provides an opportunity to select a mutually convenient time and for each of you to prepare. Once you've determined a time that works for each of you, schedule regular calls at that hour to discuss routine business.

Be Proactive
If you're not instantly familiar with the time difference between you and your client, apps such as the Time Zone Converter can help you figure it out.

Be sure to include both your local time and the client's local time in your email when you set up a call. Otherwise your phone might ring at 8 a.m. when you're expecting a call at 9 a.m. Really, it comes down to being proactive. Don't allow a miscommunication to occur when you can easily avoid it. And by taking control of the process, you can also set your expectations for the client.

Establish Clear Deadlines — But Make Yourself Available, Too
Many of your routine client communications can be conducted by email, which resolves most of the time zone issues. Still, it's important to establish response deadlines. The deadline, whether it's one business day, 48 hours, a week — whatever — can vary depending on the nature of the business or the complexity of the request. The important thing is to set a reasonable timeframe and stick to it.

Despite all of your best efforts, you might still need to make yourself available outside normal business hours to accommodate a client in a different time zone. As long as both parties are considerate of one another’s preferred working schedule you should be able to collaborate harmoniously with minimal disruptions. Being thoughtful and flexible in these ways creates the opportunity to work remotely with interesting clients all over the United States — and beyond!

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Automating Recurring Charges with QuickBooks Online

December 22, 2016 / by Angel Mazariegos posted in Santa Monica, Los Angeles

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Angel-Mazariegos-for-web-square.jpgRecently I’ve been approached by several clients looking for a way to automate collection on their recurring credit card payments using QuickBooks Online (QBO)—one of the best web-based tools for small business bookkeeping services.

For business owners who have multiple recurring payments to collect, automating recurring payments can help you streamline your processes.

For example, think of a produce distributor who makes multiple regular deliveries to local restaurants. Each month the same goods are distributed at the same price. For both the distributor and the restaurants, a lot of time and effort can be saved by automating this invoicing and payment process.

To set up an automatically recurring charge:

  1. Go to the top right corner of your QuickBooks Online window. Click “Company/Gear” and then select Recurring Transactions.
  1. Click “New,” then choose “Sales Receipt” as your transaction type. You’ll be presented with a sales receipt template form.
  1. Choose “Scheduled” as your type of Template and give it a name. Select a customer and enter in an email address so that your client will receive a confirmation email when the payment goes through.
  1. Set up your payment Interval as well as your Start and End date (if needed).
  1. Enter in your client’s credit card payment information. Make sure to check the box that says “Process Credit Card.”
  1. Fill out the rest of the Sales Receipt. This should be straightforward, done the same way as with any other sales receipt, recurring or non-recurring.
  1. Hit “Save.” You’ll receive a recurring credit card authorization form. Have your client sign this form and return it to you before the first payment goes through. Then either save this form or hand it over to your bookkeeping services provider for safekeeping.*

After this you’ll be all set up to collect this regular payment automatically, no manual data-entry required. If the details of the payment should change, just return to this sales receipt to make any necessary changes. 

*NOTE:  There are PCI compliance requirements regarding the proper transmittal and storage of credit card information.  If you are unsure of how to comply, consult your bookkeeping services provider, CPA, or legal counsel.

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Outsourcing Accounting Options: Which Is Best for Your Business?

December 20, 2016 / by Jennifer Lang posted in Santa Monica, Los Angeles

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jennifer-lang.pngIn a recent post, Supporting Strategies' Garrett Smith made a compelling case that growing companies should consider outsourcing select non-core business functions.

Basically, the point of the article was that the more responsibilities the business owner can hand off, the more they can focus on their company's reason for being. If you're in the medical-supplies business, you should spend your time figuring out ways to sell more medical supplies. Time spent on anything else takes away from your focus.

As Smith noted, accounting is one obvious business function that is ripe for delegation. Let's take a look at the three basic options.

1. Full-Time
If you have a full-time bookkeeper or accountant on staff, you've already effectively delegated this responsibility. The question here is one of value. You need to calculate the cost of that full-time staff member relative to their production and then determine whether it is possible to outsource that position to a more cost-effective part-time resource.

When comparing costs, be sure to factor in not only a full-time staffer's salary, but also the cost of their benefits package, employment taxes and insurance, use of office space, etc. Then it becomes a simple bottom-line comparison.

2. Part-Time
If you're a small-business owner who's wearing too many hats, including a bookkeeper's, you face a dilemma: You don't have enough bookkeeping or accounting work to hire another staff member, but you have too much to effectively handle yourself — or to pile on one of your already overworked employees.

The solution is straightforward, particularly if you're looking to outsource a few tasks like payroll, accounts payable or accounts receivable rather than the whole accounting cycle: Pay an hourly rate or flat fee each month to outsource those responsibilities. Chances are you and your staff can use the time you free up to bring in enough new business to more than offset the cost.

3. Special Projects
This takes that logic a step further. If you need help with a temporary or short-term challenge, such as your tax returns or an audit, you can bring in an outside accounting-services firm to help. You might also go this route if you grow to the point where you need to update your business infrastructure.

For example, say you want to implement a new system of inventory tracking and integrate it with your overall accounting system. Your best option is probably to outsource that job to an accounting-services provider with proficiency in that particular software.

Choosing the Best Option …
You know your business better than anyone else. You also know better than anyone else which of these outsourcing options would best fit your company. Options 2 and 3 are relatively easy to jump into without a lot of commitment, so often our new clients start off this way and grow from there. Consult your CPA or other business advisors for recommendations and further guidance in helping you make this value-creating decision for your business.

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Be Wary of Third-Party Application Promises

December 14, 2016 / by Christina Reynolds posted in Santa Monica, Los Angeles

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Christina-Reynolds-for-web-2.pngI'm a big proponent of third-party applications. After all, with the right app, you can customize an accounting system like QuickBooks to streamline many of your specific accounting processes and save a considerable amount of money and time on bookkeeping.

As with any major purchase, however, you need to read the fine print. Third-party apps might involve cutting-edge technology, but a bad sales rep can still resort to unscrupulous sales techniques that date back to the days of horse-trading. Beware of the bait-and-switch or an obvious mismatch, where the rep pushes an expensive app that's not right for your needs.

Here are some questionable practices to watch for:

  • Free trials: Get the sales rep to define "free." Is it a completely free trial, meaning with no strings attached? With some trial offers, you have to sign an annual contract, and only the first 10 days are free. Depending on the application, 10 days might not even be enough time to figure out how to use the app, let alone determine whether it suits your needs. A month into the contract, when you determine the app isn't right for you, it's too late — you're on the hook for the full year.

    Never sign a contract without thoroughly vetting it. And don't sign one that automatically kicks in if you fail to opt out after the trial period.
  • Third-party implementation consultant required: Some third-party apps need to be adapted for your needs. This step could require a third-party consultant with specialized training — which, depending on the app's complexity, could be an additional cost upwards of $10,000. So be sure to ask for details about every step and related cost involved in the setup process when pricing a third-party app, and get the details in writing.
  • Actual monthly costs vs. advertised monthly costs: If an advertised monthly cost seems too good to be true, it probably is. It could be the cost per month per user, for instance. So if you have five users, the actual monthly cost would be five times higher. Make sure you understand how the advertised monthly cost is calculated and what it includes. Is it a simple flat fee? Or is it a subscription, with the advertised per-month cost contingent on signing a long-term contract? In some cases, you'll have to ask a lot of questions to ferret out the true monthly cost.
  • Upselling or overselling: Finally, you have to be careful that the rep isn't upselling you or overselling the app. One of my clients wanted a basic third-party app and a sales rep tried to force-fit a sophisticated, super-detailed app that was way beyond what the client needed. It was like selling a riding lawnmower to someone who needed a weed trimmer. We spent many, many hours over several months wrestling with overly complex details for this client — all of which could have been avoided if the right-sized solution had been selected at the start.

Spread the Word
Many third-party apps, like Bill.com, are great products with transparent terms of service. But if someone tries to sell you a third-party app that you're not familiar with, do your due diligence. Review demos and contracts. Call references and consult third-party vendors that you have a good relationship with. Get as much information as you can before making the commitment.

And if you come across a disreputable sales rep or a third-party app that isn't all it claims to be, speak up and let others know. Even in a high-tech world like ours, word of mouth is still our best defense.

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How to Ensure Good Client Communication When Working Remotely

December 12, 2016 / by Laura Conner posted in Santa Monica, Los Angeles

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Laura-Conner-for-web.pngIn our digital age, miscommunications in emails are an all-too-common occurrence. How can you avoid making mistakes that may have significant consequences for your organization?

As a national leader in providing virtual accounting and bookkeeping services, Supporting Strategies knows a lot about communicating effectively when working remotely. Here are some tips on how you can do the same.

  • Polish your writing skills. Whatever industry you're in, writing skills will help. For example, any accountant can do numbers. But not every accountant can tell you the story behind the numbers. Good writing skills will come in handy when writing a summary to go along with your monthly reports.
  • Don't rely on email exclusively. Even good writers run into problems at times when using email because it's tone-deaf. Take a simple two-word reply like "Got it." What does that mean? Is your client simply acknowledging that they received your email? Or are they too busy to review and answer questions? When in doubt, pick up the phone immediately. It's a simple way to resolve any misunderstandings.
  • Schedule regular meetings. Be sure to check in with your clients by phone or videoconference periodically. That's the best way to ferret out key pieces of information that would otherwise have fallen through the cracks. It often works best to schedule recurring meetings in advance so both parties are available and prepared to get right down to business at the scheduled time, reducing the need for inefficient back-and-forth correspondence between meetings. It also helps to maintain a shared "open items" list so everyone is on the same page with any pending items between meetings.
  • Listen. This might be the most important communications skill of all — and it requires no special training, no software and no advanced degree. All you need is a willingness to hear what your client has to say. And you can do that no matter where you're working.

Here at Supporting Strategies, being proactive in our communication is part of the package. After all, just because we work remotely doesn't mean we're out of touch.

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Be Careful with Those Not-For-Profit Allocations

December 6, 2016 / by Sandra Bowman posted in Santa Monica, Los Angeles

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sandra-bowman-for-web-square.jpgOne of the stickiest aspects of accounting for not-for-profit (NFP) entities involves allocations — how these entities account for where they spend the funds they receive.

For-profit businesses don't have to worry about this too much. If you have a pizza parlor, it doesn't matter if you use the profits from your pizza sales to pay the rent and the profits from your soda sales to pay the utilities (or vice versa). The customers don't care what you do with their money, as long as they get their pizza and their drinks.

It's not so simple at an NFP entity.

How You Got the Money Can Determine Where You Spend It
Many NFP entities receive funds that are earmarked for specific purposes. For example, let's say an organization receives a grant expressly to provide wheelchairs for the physically challenged. The organization can't use that funding to sponsor an event instead. They have to spend it on wheelchairs — and they need documentation to prove they did. (This is called "direct identification.")

Allocations can get incredibly granular. If, for example, an NFP entity decides to include information about both an upcoming fundraiser and an annual membership drive in the same mailer, they actually have to break down the percentage of the mailer devoted to each purpose to properly allocate funds. (These are considered indirect allocations.) If 30% of the mailer is about the fundraiser, then 30% of the cost should come from the fundraising budget. The remaining 70% comes from the membership-drive budget.

How does the NFP entity calculate those percentages? That's where the guidelines toggle from precise to vague. (Speaking of vagueness: There's a subtle distinction between an NFP entity and nonprofit organization.) A recent Accounting Standards Update from the Financial Accounting Standards Board (FASB) says only that each NFP entity's method of allocation has to be "reasonable."

Setting the Standards
So what's "reasonable"? Whatever method an NFP entity chooses to determine its allocations, the key is to apply it consistently. If, in our example above, an organization determines the percentage of the mailer devoted to fundraising based on the number of lines, they need to do that with all mailers. Or they can use the number of words as a determinant. Again, consistency is the key.

Other key takeaways from the recent update include:

  • Make sure allocations are accurately calculated. Breaking down the allocation of every dollar an NFP entity spends is painstaking but necessary.
  • Make sure management reviews all allocations. Given the complexity and importance of accurate allocations, this is a task that should require high-level sign-off.
  • Document your allocation plan and circulate it to all involved. When it comes to allocations, everyone needs to be on the same page — literally.
  • Make sure all expenses fit the scope of your organization. NFP entities are governed by strict guidelines. You need to adhere to them or risk trouble with the IRS. Use a critical eye to compare your expenses to those of similar organizations, and be sure you're in line with accepted standards.

We've barely scratched the surface here. The FASB's Accounting Standards Update on this topic consumes 270 pages — and even then, the report concedes that "The amendments in this Update make certain improvements that address many, but not all, of the identified issues about the current financial reporting for NFPs." So stay vigilant.

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Can't Afford to Invest in Internal Controls? You Can't Afford Not To.

December 2, 2016 / by Christi Todd posted in Santa Monica, Los Angeles

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christi-todd-for-web-square.jpgCould your small business survive a six-figure loss and the ensuing turmoil? Unfortunately, many can't. And that highlights why instituting internal controls is so important.

According to the Association of Certified Fraud Examiners' 2014 Report to the Nations on Occupational Fraud and Abuse:

  • The median loss to small businesses (those with fewer than 100 employees) that experienced a fraud loss was $154,000.
  • Small businesses suffered 28.8% of all losses studied.
  • In nearly 60% of cases, NO assets were recovered.

Those are sobering facts. The good news? There are a number of low-cost ways to reduce your business' exposure to loss from someone stealing your organization's assets. Let's look at a few of them:

Code of conduct/anti-fraud policy: Will signing a piece of paper keep an employee from stealing? Probably not. But it will set out your understanding of what is acceptable and unacceptable behavior.

An activity that is clearly theft to you might be perceived by an employee as simply a perk of the job. Spell it out upfront. Your payroll provider probably has some good examples, and an internet search will yield more. Cost to you: a few hours' research and some paper. We recommend also consulting your labor attorney on this type of matter.

Employee assistance programs (EAPs): What does this have to do with reducing employee theft? Well, an EAP won't keep bad people from taking advantage when they have the opportunity. However, fraudsters are frequently good employees with a great work history who make bad choices due to personal stressors such as financial or health problems, divorce, addiction issues, etc. Taking away the motivation to commit fraud can help keep fraud from happening in the first place.

An EAP directs employees to the resources they need to get help and is surprisingly affordable. Speak with an insurance broker who specializes in employee benefits.

Eliminating checks: Check tampering is still a common way to commit theft, and the median loss in check-tampering cases is around $120,000. Many business owners give their accounts payable (A/P) resource signing authority on the company checking account or direct access to their online banking bill-pay service, which are unnecessary risks.

A better option: Change your A/P system from a manual check-issuance program to an application such as Bill.com. With this application, you can review and approve vendor bills, and then Bill.com issues the payment. You control who in your organization is authorized to review and approve bills and who can release them for payment, minimizing opportunities for fraud. No more blank checks floating around your office, and the system keeps a detailed log of each authorized user's activities so nothing in the A/P system can happen in secret.

Segregation of duties: Two is better than one! Segregation of duties has traditionally been impossible for small organizations. But that's changing. For example, at Supporting Strategies, our tech-forward, team-based approach enables proper segregation of duties and provides clients with direct access to a full-time accounting back office while only paying for the hours they use.

We reconcile bank activity and all balance sheet accounts with two sets of eyes, which adds quality assurance to your bookkeeping. Plus, we double-check our own work and stay abreast of the latest accounting software, payroll services and other applications so you don't have to.

Final Thoughts
There are plenty of other highly effective techniques that you should explore, such as hotlines (THE number one way to detect fraud, by the way). I encourage you to read more at the ACFE web site.

As the Report to the Nations makes clear, there is no one way to eliminate fraud. Having the right internal controls in place, though, can help reduce the impact. Thanks to Paul McCormack at McCormack Writes for this topic idea.

Contact us to learn more about how to set up the proper internal controls for your business.

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Legal and Tax Disclaimer
This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.

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