chaos | 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

Seven Symptoms of Costly Chaos

The president sat in his high backed chair behind a desk piled high with files and a credenza spilling off onto the floor. “Steve,” he said, “I just don’t understand why we are not making money. Cash is running out the door. What can we do?” The phone rang and he yelled at the person on the other end for about two minutes before abruptly hanging up. He then told me that he was about to fire the caller because even after 10 years they just could not get the orders right. “He’s my problem, him and the other fools that I have hired.”

I asked the president what system they were using to track orders. He showed me a computer program that was functionally obsolete. It did not track order details from inception to completion. It failed to communicate the critical information needed by the dozens of people involved in the process. They were supposed to “know what to do” from past practice. It did not integrate with the accounting system or the inventory system.

When asked why he had not upgraded to an integrated system he said that it cost too much money and would be a distraction to implement. Couldn’t I see that they were too busy? His people did not need systems and training; they needed to pay attention to the details and do their jobs.

Here are seven of the symptoms of chaos that indicate you might be paying too little for your systems, management, training and other methods of chaos reduction:

1) Piles of papers where they don’t belong
2) Quality problems
3) Disorder in the office and in the plant
4) Surplus materials accumulating
5) A frequent need for troubleshooting and problem solving
6) Safety problems and/or accidents
7) You do not have an effective continuous improvement process

A continuous improvement process like the Profit Improvement Process engages the entire team in making order out of chaos and putting cash back into the company where it belongs.

PS: I left this president in his office when he started yelling out the door at another incompetent employee about another mistake. He seems content to be paying the price of chaos. I estimate they’ll last another year at this pace. Then chaos will win.

Don’t let chaos beat you.

Reconcile Now or Lose Big

Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

A local law office reported that they lost well over $600,000 to embezzlement by their bookkeeper over a 5 year period. The perpetrator was caught, convicted and sentenced to jail for up to 4 years and to pay restitution of $400 per month for 16 years ($76,800).

Once you look for them, you will see that the news feeds are filled with similar stories of embezzlement and the miss-use of funds.

There are two primary reasons for reconciling your bank accounts every time a statement comes out.

The reconciliation allows you to maintain the accuracy of your accounting records and those of the bank. The sooner an error is caught, the easier it is to correct.
A bank reconciliation is an opportunity to detect fraud and theft.

Either of these reasons should be adequate so don’t let reconciliations fall through the cracks. Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

Why Suggestion Programs do Not Work

Why don’t suggestion programs work?

The typical suggestion program or suggestion box is an open ended and unstructured solicitation of ideas. They will typically end up:

As a place to put “nice to have ideas” rather than improvement projects
As a venue to complain
An expense rather than a savings
A disappointment for all
Annoying and disengaging participants
Wasting a lot of time and money

This happens because:

Suggestions that are submitted drop into a “black hole” or
Some suggestions are implemented and others are ignored
Goals are unclear
They lack adequate structure
The participants and not adequately trained
Expectations are not set and guided
The criteria are muddy or missing
There is little or no reward for participation

If you want ideas from your employees, use world-class methods such as Lean, TQM, ISO, Six-Sigma or the Business Solutions: The Positive Way Profit Improvement Process.

One organization with tens of thousands of employees gave up after less than 36 months when they found out that they were not only NOT saving money but they were increasing costs and reducing morale. Painting the ladies bathrooms pink was just one of the suggestions that was rejected because there was no clear ROI. That rejection and others did not go over well at all.

If you are serious about improving your financial situation and sustainability, you need to get serious about having a structured program that engages your team and leadership from the top. We know the ways to do this well and will be happy to review them with you.

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.