List of Sam's other articles

Theft-Proof Your Business

The other day I read a news story: “One of five men charged in…an elaborate, decade-long scheme to steal more than $4 million from Building 19 stores pleaded guilty on Friday….” Could an employee steal millions from you?

Employee embezzlement and theft happens far more often than we like to think. Each year, American retailers lose more than $33 billion to customer and employee intentional theft (not counting human error). You want your products to fly of the shelves and out the door – but only after they have been paid for.

During my fifty years working with flooring dealers, I’ve sadly witnessed too many dealers sapped by employee theft. Some had to fold; others worked for years to recover, while sacrificing much. Consider the plight of the mid-west dealer who lost $800,000 to an embezzler!

What’s the cost of employee theft? If an employee stole $10,000 from you and your Net Profit were 3% (average in our industry), you’d either have to reduce your take-home pay by about $12,000 (with payroll taxes), OR sell an additional $333,333. How many more years would you have to work to sell that much more than you’re already selling? (To calculate how much more, divide the amount stolen by your Net Profit percentage.)

A national fraud expert counsels us to be alert to the three conditions that invite fraud:

1. The employee feels financial or emotional pressure to take extraordinary measures;

2. He/she perceives an opportunity to steal and get away with it;

3. The embezzler rationalizes. Embezzlers start small and tell themselves, “It’s just this one time” … and they promise themselves, they will pay it back. But when the amounts grow, they realize they cannot.

Recently, a flooring dealer told me of a customer who called to complain about a problem with her floor. The owner couldn’t find the original invoice, but the customer had her copy. Written across her copy was “paid in full” with the signature of a part-time salesperson. Neither the invoice nor the money made it back to the retailer.

I urge you to review your business systems for effective checks and balances. America has become a great country and protected itself from potential despots because of its system of checks and balances. Trust everyone who seems trustworthy, but maintain financial controls.

Start with your hiring system. Pre-screen applicants for criminal records, credit history, and relationship problems (sexual harassment or violence) in prior jobs. Use this system for every new-hire, even those you know well. Janice Clifton, owner of Abbey Carpets Unlimited Design Center of Napa, California, was burned by trusting a friend she hired to manage the warehouse. “I never worried about trusted employees, so for them I didn’t have checks and balances. That was a big mistake.” The warehouse manager stole for years. He was caught only when someone informed on him, and she verified the thefts by installing video cameras in the warehouse. It cost Janice hundreds of thousands of dollars.

Another example of unjustified trust was the girl Friday who “was like one of the family”. She found she could pay her own bills with company checks.

I urge you to install systems to avoid employee theft. Some examples:

 1. Install mirrors and/or closed-circuit video cameras in the warehouse and outside over the loading dock.

 2. Use point of purchase software. Require all bids and sales to go through your accounting software. Eliminate paper bids that can be turned into invoices.

 3. Require even small sales for cash to be entered into your accounting software. And require a signed voucher for every cash-drawer disbursement. I know one retailer who gave two crisp $50 bills to neighbors to buy accessories and remnants at his store. The next day, neither bill was in the cash drawer. Taco Bell fights employee theft by posting a sign in its drive-thru windows: “If you don’t receive a receipt or the amount doesn’t match what you are asked to pay, please call 1-800 ….”

 4. Rotate employee assignments, to prevent collusion. Require every employee, including your accountant and bookkeeper, to take vacations, so that someone else has to handle their work for a period. (They may notice irregularities.)

 5. Make sure the person who writes the checks does not reconcile the bank statement.

 6. Take a physical inventory every quarter. In addition, have non-warehouse employees make surprise counts of inventory. Compare the counts with inventory records.

 7. Check daily cash flow against accounts receivable and items sold.

 8. Randomly monitor high-volume items, such as roll inventory that is continually stocked, cut, and restocked)

 9. In your employee policy manual, clearly state that you will prosecute any employee theft.

10. Read your financial statements by the 5th of each month. Search for irregularities. Janice says that this practice has helped a great deal. Another retailer noticed his average gross margin was 10 percentage points below what his marked-prices should have produced. My answer: product is probably disappearing out the backdoor.

This list is not complete. Consult your outside accountant to help you design additional controls.

I advise you to treat your employees with respect, and trust everyone who seems trustworthy, but still maintain controls. Employees will understand that controls are meant to help everyone be honest. Employees may relate to this example: if we ask a hungry child to save the cookies on the counter for dinner and then we leave, the child might succumb to the temptation to eat one.

Theft-controls, used consistently, can eliminate the opportunities for theft. I hope you are not the next victim.

Sam Allman, October 2007