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E-Myth – “Why most small businesses don’t work & what to do about it”

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Part-time CFO | How Small Businesses Can Mitigate Fraud Risk

Entrepreneurs who open businesses face significant challenges in starting up and operating that small business says part-time CFO. Out of all of the risks that they face, fraud shouldnít be one of them. However business owners every day are putting their business and their finances at risk by not implementing simple procedures that can not only lessen the risk of fraud within their business, but in some cases completely eliminate the risk altogether. Business owners have enough to worry about in their business without wondering if there staff are being dishonest.

The biggest way that businesses get defrauded by their employees says part-time CFO is when they are working on financial tasks within the company. Many business owners are extremely short on cash when they open up their business, and donít believe they have the money to put two people on a financial task in order to minimize the risk. However business owners need to consider what is more expensive to them in the long run, paying the two people, or being defrauded for thousands of dollars. One thing that business owners should consider if they do believe they canít pay for to staff, is to research options on what it would cost to have a third-party company look after that task. Itís a great alternative says part time CFO because it would completely eliminate the fraud risk from the company altogether by simply not having it in the house. Peace of mind can be worth the price business owners to pay that third-party company, and often itís much less expensive than hiring two people to do the same job.

One of the most common financial tasks that have the greatest potential to have fraud activities associated with it is payroll. There are several ways where a dishonest employee could steal money from the company. If the business owners know these risks, they can minimize or avoid them altogether. The first way that employee could use payroll to steal from the company is simply by inflating the number of hours that they have worked in a week, or increasing their wage per hour. This is very common, however not often caught, because business owners are not checking payroll against pay stubs themselves. Itís also not often caught, because employees who steal money this way, are stealing little bits at a time as to not raise suspicion. They still little bits of money over significant amounts of time, and through several years of this can defraud companies hundreds of thousands of dollars says part-time CFO.

Another way employees can use payroll to defraud a company is when they use a dummy corporation. The way this works, is that the employee makes a payment that doesnít actually exist in the system and sends it to a company with the corporate name that doesnít actually exist. The employee then cashes the check, and the business loses that money. Business owners should always be suspicious if they see a payment that looks legitimate, but doesnít have any invoices that can trace to its.

Industry Canada says that 50% of all businesses close the doors to the business within five years, and that out of all those failed businesses, 29% will say that they ran out of cash is a sobering statistic says part-time CFO. A business undertakes several risks when they open their doors, but fraud shouldnít be one of those risks. There are several ways that business owners can unknowingly be at risk for being victims of fraud in their own company, but luckily there are several ways that businesses can protect themselves. By protecting themselves against fraud, business owners can either eliminate some threats completely, and greatly reduce others.

One of the ways that businesses can completely eliminate fraud risks within their business is to either have more than one person working on any financial task of time, or outsourcing that financial task to third-party company. Thereís many reasons why businesses should do this, because it can guard against so many potential fraud threats. The first one is payroll. There are several ways that employees can defraud businesses through payroll alone says part-time CFO. If they know about all the different ways, business owners can either ensure two people work on payroll at a time, or look into their options for hiring third-party companies. The first way that business owners can use payroll in order to defraud the company is through payroll remittances. This is extremely and hard to catch when it happens. The employee makes a lump sum payment of all of the payroll remittances to CRA. But they increased the payroll remittances being paid to themselves. At the end of the year, CRA will notice that more remittances were paid and should have been, so they send back a refund check. The problem with this says part-time CFO is that that check goes to the employee and not the business owner. The employee cashes the check and pockets the money, and the business owner is out that many and none the wiser. This is extremely hard to catch because even if a business owner is double checking, the only way they can guard against this particular fraudulent activity is by calculating all of the payroll remittances themselves by hand and comparing it to the amount of money that was sent to CRA. If an employee did this over several years, it can add up to a significant amount of money.

Another way that payroll employees can defraud the business is by creating fake corporations to send payments to. The payment looks legitimate to the business owner because is going to a corporation, but the employee takes the check and cashes it. Business owners need to be aware that when they are reviewing payments, that something doesnít make sense, even if it looks like itís going to legitimate company, businesses should question it.