Material | Business Solutions

Who is Stealing Your Profits

The question for you is not “if” your profits are being stolen but the only question is “Who is stealing how much?”

The estimate of embezzlement for the US alone in 2018 was almost $50 billion. This included robbery, cargo theft, larceny and burglary. The top incidents were organized retail crime, employee theft, fraud, burglary, counterfeiting and robbery. Note that employee theft far exceeded the losses due to robbery. In a 2017 survey by Hiscox* the median dollar amount for small or mid-sized businesses (under 500 employees) was $289,864. The median loss for companies with over 500 employees was estimated to be $452,025.

Hiscok provides the following common characteristics to look out for:

Intelligent and curious – eager to know how everything in the office works
Extravagant – often flaunt their wealth
Egotistical risk-taker – rule breaker on and off the job
Diligent and ambitious – beware of the person who does not take vacations
Disgruntled – feel treated unfairly and may want to even the score

I’ll add one more from experience: They are the manager, accountant, controller, bookkeeper or clerk who just can’t get the reports straight and on time. They love disorder in which to hide their own dealings.

According to the National Retail Federation retail goods shrinkage of $48.9 billion is due to four major sources: employee theft (30%), shoplifting (36.5%), administrative error (21.3%), vendor fraud/error (5.4%) and unknown loss (6.8%).**

None of these figures include the billions of dollars lost to employee time that is deliberately wasted, time card falsification, inflated expense accounts, office supplies that end up at home and countless other ways in which employees waste company time and money. Excuse me while I check my FB account…

A number of years ago a senior sales executive (over 25 years with the company) warned me not to make him work from home because he assured me that he would extract the “cost” from the company in any number of ways that the company could never detect. I was no longer with that company when that move was finally made to save money so I don’t know how much, if any, this long-term employee extracted in “payment.” I often wondered which of his supervisors allowed him to harbor such a terrible attitude.

Just within this year two priests in my city have been indicted for embezzling hundreds of thousands of dollars from their churches. Prevention is a wise thing to do and don’t forget to help keep your employees honest with good systems and audits while you are locking the front door. Embezzlement and shrinkage is just two aspects of the element of Loss which is part of the Profit Equation.

How much of your hard-earned profits can you afford to allow the thieves within and outside your business to take?

References:

*THE 2017 HISCOX Embezzlement Study

** 2017 National Retail Security Survey

Too Much of a Good Thing

Stock Keeping Unit (SKU) proliferation is a tempting thing. It can be hard to argue against the logic of adding another product or service type to your catalogue to increase sales.

The problem is that every SKU carries real costs with it. In an article published in the Journal of Operations Management “Too much of a good thing: The impact of product variety on operations and sales performance” Xiang Wan and his colleagues examine the sales and operational performance of a major US soft drink bottler that distributed 328 SKUs from a network of 108 distribution centers where the range of SKUs ran between eight and 114. They determined that the optimal number of SKUs was 84. Below 84 there was opportunity to better serve customer niches and above that the cost of lower operational performance exceeded any benefits.

Cost per SKU should take into account factors including the following:

Capital for production
Capital for inventory
Productivity losses due to changeovers
Labeling and cataloging
Storage
Obsolescence and damage losses
Picking
Shipping
Reduction in inventory turns
Increased forecasting problems
Cost of stock-out
Clogged supply chain
Added complexity
Customer confusion

The bottom line is to apply the Pareto Principle wisely when tempted to add SKU’s. You just might find that you have too much of a “good thing” and that less is more. I have personally worked with clients who have put hundreds of thousands of dollars back into cash and increased profitable sales significantly just by eliminating 10-20% of their SKU’s.

Paper Losses

A typical office may have anywhere from 4 to 20 different types and brands of paper in its inventory at any one time. This may not seem to be a significant issue but paper costs anywhere from $0.006 (low-end standard copy paper) to $1.00 (fancy letterhead) or more per sheet when all costs are included.

An analysis for one organization found that the lack of standardized purchasing allowed them to spend about $85,000 each year in extra costs just for copy paper. We conducted the analysis in this manner:

-Examine purchasing invoices for copy paper

-Tabulate the costs paid for each quantity

-Calculate the savings possible if the lowest cost supplier had been used

The recommendations were to centralize purchasing decisions and to communicate standardized purchasing procedures to those people who managed the paper inventories at dispersed locations.

The analysis did not determine how much could have been saved if less paper had been used but the qualitative judgment was that the savings could have exceeded the purchasing savings.

Paper losses like these are an indicator of even deeper loss of control over expenses.