Having visited many different retail businesses over the last 12 months, I have become concerned at the loss of cash and profits that I am hearing about due to fraud.

Most store owners and managers associate fraud with large corporations and massive scams and scandals that they read about in the newspaper or on the net.

But every business larger than a one-man news kiosk offers plundering opportunities to the employee who’s looking for them.

Embezzlement is like a silent, insidious cancer, hidden and unsuspected, gnawing at a business’s vitals and sapping its lifeblood.

When finally discovered, the effects of fraud may be irreversible and the damage irreparable. Indeed, with soaring expenses, shrinking profit margins and ever-increasing competition, the owner or manager of a store may be hard pressed to keep the doors open and remain solvent.

Inadvertently sharing hard earned profits with thieving employees, the delicate balance between financial solidity and insolvency may well hinge on the owner or manager’s ability to plug the leaks.

 

WHERE’S IT ALL GOING?

Most fraud in small business centres around false invoicing, bogus suppliers, staff issuing payments to themselves and concealing the paperwork on the computer or not ringing up cash sales as well as fraudulent credits on the EFTPOS machine.

Shrinkage – that is theft of stock – is another component of fraud.

And just on shrinkage, last year I conducted a workshop where a senior executive who had just joined the organisation from a large corporate retail group related his experience that, for every $1 stolen by customers, $7 was taken by staff!

Successful fraud occurs for two reasons:

1. We place complete trust in our employees.
2. Owners and managers put book keeping into the too hard basket.

How can you reduce opportunities for fraud? Read on…

 

MINIMISE THE OPPORTUNITIES!

Although you shouldn’t treat the following as a definitive list, let’s talk about some ways of minimising risk.

As managers and owners you should:

• Sign/countersign all cheques and electronic transactions – You are committing commercial suicide by allowing your book keeper to make out, sign and mail a cheque or process an online payment without backup paperwork.
• Conduct random stocktakes – say just 10 products a day and relate this physical count to the computer records
• Review your bank account daily – Use the internet. I do this with my business, whether I am in my office or in a hotel room overseas.
• Get involved in the book keeping – Don’t become too dependent on your book keeper and make sure your accounts people take regular holidays.
• Ask questions – Especially if you are regularly contacted by creditors asking for payment.
• Ensure sales are authorised – All account sales invoices should have the customer’s signature on them.
• Conduct regular bank reconciliations – This way you can control the whole bookkeeping process. Do it at least monthly – some large organisations do their reconciliations weekly. If the book keeper does the reconciliation, the owner or manager needs to check it.
• Check your Gross Profit Margin – If it drops suddenly, the reason may lie in the purchase of stock; creditors may have been paid twice with one payment going to one of your staff. Another possible cause is that some cash sales may not be processed through the point of sale system (this is “the black economy”).
• Check your stockturn – A jump in stockturn without any noticeable increase in sales can point to an irregularity in the amount of stock on hand.
• Keep an eye on things – Implement CTV systems and review the footage if you suspect irregular activity and restrict after hour’s access to the store.

 

REDUCING A “BLIND SPOT”

I know a lot of this is common sense, but experience tells me that some owners and managers do not bring their basic good processes to bear on this area.

As if you needed any further encouragement to address or prevent fraud, remember that, even if the loss is only $1,000, you need to sell $50,000 worth of product (if your Net Profit Margin is 2%) to recover that $1,000!

Any employer who would protect themselves against employee dishonesty must face the facts and then take steps to reduce the risk. If they fail to act and then suffer loss, they have no one but themselves to blame.

As the old Chinese saying goes:
“May the gods protect me from those I trust. Against all others I can defend myself”.

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Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au