Loss Prevention and Risk Management
What loss prevention tips are you using to survive in your small business. Loss prevention is not just about catching shoplifters. Read these tips to save your money!
Most business people avoid thinking about the connection between loss prevention, risk management, theft, hiring employees, insurance and how losses affect your small business survival.
Think risk management in terms of internal, external, and errors and how you can avoid or improve your loss prevention efforts.
This post is very long and I hope to raise your awareness of risk management regardless of what type of business you manage. Every business has banking, assets, risks of weather and liability.
Enjoy your read and feel free to skip to sections that pertain to your particular business.
In a typical small business with one million in sales you run at an operating profit of around 8% not accounting for various risk management issues. If I assume a 2% shrink it costs you $20,000 a year. However even a well-managed business will find that losses can run 6-10% or upwards of $100,000 in some years.
Do I have your attention.on this subject? The reality is loss prevention issue are very costly to all business whether it is the cost directly incurred from losses or the costs associated with insurance and asset protection.
6 Short Stories about Loss Prevention
I worked for some very large retail organizations with lots of individual retail store locations. This gave me insight into strange incidents not unique to just these companies.
Story One: Employee Theft
Once at a tire store during closing the manager noticed his employee throw a tire into the trash bin out back. We later inspected and found two new tires in the trash.
We waited in hiding for four hours until our wayward employee showed up with friends to retrieve our tires.
During the interview and investigation I discovered the employee took one or two tires every day he had worked for two years. The result was 600 tires costing $30,000 in losses.
Story Two: Banking Rules
One employee took the bank deposit from the weekend to the night drop box during the day and went home. Two weeks later the bank still had no record of the deposits.
After both a bank investigation and company investigation we terminated the employee and her manager. The loss was close to $24,000.
The company policy was daily deposits. The bank was in the mall parking lot next to the store. The employee failed to return to the store and check in with the superisor.
The manager’s termination was for failing to work his required weekends. He allowed weekend supervisors to hold the deposits until Sunday violatiing a clear policy.
Story Three: Bank Security and Loss Prevention
Another situation developed with a missing deposit. The bank upon investigation removed the drop box only to find deposits from several companies. The drop box had malfunctioned.
Story Four: Bank Security, Termination, Liability
A bank was remodeling and putting in a new drop box. During construction a deposit bag was found in the amount of $17,000. The bank originally claimed they never received the deposit.
One employee was terminated fourteen months earlier over a policy violation. The employee had told the truth and offered employment and settlement.
Story Five: Loss Prevention Investigation
During an investigation a manager seeded a deposit with 20 dollars extra to see if a suspected employee would return the extra money to the store.
The employee returned from the bank but did not bring the extra money back. We called the bank. They reviewed their CCTV and discovered their cashier had pocketed the funds.
Story Six: Lottery Loss and Investigation
Once I walked with an employee to their car. When he opened the door a bunch of lottery scratch off cards fell from the car on to the ground. The store verified the theft of 13,000 lottery scratch cards in one year.
I have run across a hundred strange cases during my career.
Loss Prevention Rules and Policies
Many people assume that big companies have far too many policies.
They are inefficient and unresponsive to both customers and employees. Policies are reactive to strange occurrences in the workplace. The more you are trying to prevent problems the more policies you create.
Big companies simply have more strange situations occur.
Small businesses have the opposite problem in having too few policies.
Consider that loss prevention professionals believe in the 10-10-80 rule about people. Ten percent of employees would never steal. Ten percent are working only to steal. Eighty percent of employees at some point will find the right opportunity and need to steal.
So let us start with employees and some of the ways they cost you money. (Start here first with those in restaurants or retailing.)
Loss Prevention Tips: Employee Shrink
Why is loss prevention so focused on employee shrink? How big can it be?
The reality is some employees make far more money stealing from businesses than they are being paid to work. They choose their target work location based on how much they can steal.
Other employees only would steal if given the opportunity. Keep your employees honest and establish good loss prevention work rules.
- Employees while appearing to process transactions through the register are in fact allowing some unpaid merchandise to leave the building.
- Allowing unauthorized discounts.
- An example would be phone sign up where a $100 phone leaves the building with a customer who signed up for phone service. Later we discovered the customer was never in the building and the service never authorized. The phone cost is now lost to the business.
- This can happen with any service and product tie in offer.
- Small and large cash losses due to poor cash handling practices or outright theft.
- Accepting unauthorized credit cards.
- Bad check and poor check acceptance practices cause errors or real fraud.
- Why does an employee have so many void transactions? Sweethearting? The employee appears busy ringing customers.
- It is easy to refund an item picked up off the shelf or never returned to the store. (Once caught an employee who admitted to $7,000 in fraudulent refunds in one year.)
- Again the employee appears busy while unpaid product is leaving the store.
- If you find empty boxes in the warehouse it is a sign of employee theft.
- These are unintentional errors but they can create significant losses.
Employee created losses far exceed losses from external sources such as shoplifters. Internal theft is a real problem for American businesses.
Risk Management: Business Interruptions
If you just went through Hurricane Sandy then you know about business interruptions and the effect natural disasters can have on your business and business survival.
Every year there are a series of natural and manmade disasters which ruin businesses. Are you ready to reduce the effect on your business?
- Power Outage
- Gas, Water, & Utilities interruptions
- Road Construction
- Hurricane, Earthquake, Rain, Wind
- Fire and/or Arson
You should have a talk with your insurance agent about business interruption insurance and other forms of coverage.
You may or may not actually decide to buy the coverage depending on your potential for loss and cost of the insurance coverage. Every business has different insurance needs.
Be aware of your insurance options by having an informed discussion with your agent.
You need to have those resource lists available for times when you can not access your business site.
- List of all employee phone numbers
- Key employee availability list as first responders
- List of vendor and resource contacts
- Chamber of Commerce
- Red Cross
- City government
- Window and Door repair company
- Fire Department (911)
- Primary vendors and suppliers
Banking and Accounting Loss Prevention
Usually banking cash losses occur when only one person is responsible for paying bills and reviewing the bank statement. These losses usually happen with some form of accounting fraud.
So who does your books?
In small businesses I recommend only one owner who signs all the checks. All owners should control the checks including the checks not yet written.
It is surprising the number of missing checks from within unused check books that show up during fraud admissions. Do not make it too easy for an employee, even a trusted employee, to remove a check from within a checkbook.
Also the owner is the one reviewing the bank statement. Bank mistakes, errors, and fraud can occur and over time will happen to any small business. Check your bank statements yourself.
Look at paying bills and vendor invoices as a big source of fraud. It is easy for your bookkeeper to process an invoice and pay a friend or company she owns. It looks like any other legitimate company invoice.
Also look for vendor kickbacks by trusted employees.
Did I mention two costly practices that could be costing your business money?
- Someone allows persons to claim unemployment who never worked for you. It doesn’t directly cost you money but does increase you unemployment rate and corresponding costs over time.
dependent benefit insurance fraud
- Employees claim dependents who would not normally qualify for health care benefits. Boyfriends, girlfriends, and college age sons and daughters are often listed as employee dependents.
- Believe it or not but about 15% of dependent are found ineligible during benefit audits.
Risk Management and Insurance
I mentioned above the need for a good conversation with your insurance agent about various types of coverage. You can not insure for all losses. It is prohivited.
Consider the need for the following types of coverage.
- Business Interruption
- Real Estate
- Wrongful imprisonment and arrest
- Various types of bonded coverage including officer coverage for 401(k), profit-sharing, pension plans, medical, dental, life, and disability are required under ERISA.
Retail Shrink and Loss Prevention
A quick list of the many types of losses occurring in a retail business.
- Pricing Errors
- Bottom of Cart
- Scanning Errors
- Vendor check in and receiving errors
- Credit Cards
- Security and Safety
- Slip and Falls
- Opening and Closing procedures
- Workplace Violence
I once had two stores in one state destroyed by fire while open for business.
During the second fire investigation one employee admitted to setting both fires to hide his theft activity before the upcoming company inventory. He was afraid his theft would be discovered during the inventory reconciliation.
Therefore he started fires. He had been an eight year employee.
Internet and Website Security
I did not want to leave out those of you who run an internet website. Oh wait that should be anyone operating a business.
- Loss prevention for websites begins with always keeping your plugins and WordPress current with the latest revisions. Hackers look for outdated websites and attack the list of fixes.
Logins and Passwords
The biggest mistake business owners make is using Admin for login and password for Password. It is too easy to hack yet these remain the most popular website logins in the world.
It takes an experienced hacker about six minutes to break a 4 – 8 digit pass code. If you use a dictionary word as your password they can use a program which takes minutes to check all dictionary words against your password.
The best passwords are 8 or more digits with upper and lowercase letters and has one or more symbols. It will still only take about 2 hours to break your password.
How often do you change your password?
- Do you backup your website? How often? Where are your backups kept? What happens to your website backups during a natural disaster or power outage?
Loss Prevention Best Practices
- Make loss prevention training a regular part of both your employee’s and manager’s training.
Profits go up when you hire and use the right employees. They go down when you have poor hiring practices.
Many managers think references, credit checks, and criminal checks are the answer. The reality is they are not. Good effective interview are the key to hiring the right employees.
I downplay former employer references during hiring. Most companies have a policy against providing references to avoid costly liability issues.
When an employee violates that trust and risks costing their company thousands in liability how effective do you think that reference is to you. Note there really is no such thing as an off the record reference.
I see experts talk about credit and criminal checks.
Again your company falls under having to prove issues uncovered somehow effect the employees ability to do the job. Assume liability and you will lose in court or if you win it will cost you $20,000 in legal fees.
My quick suggestion here is to ask about convictions on the application. Then if one finds later a conviction not disclosed then the potential employee falsified his application.
Remember you are only required to hire the best candidate.
- Install it and use it. However recognize in my experience the camera never worked when I really needed it. Just my experience.
ERISA bonded officer coverage
- You need to set up, train, and continually modify rules.
- The issue is accountability and control. Set up rules that need two people to verify movement of the deposit. Opening the safe, counting the money, making the deposit are never done by one employee whether the manager or other person.
- Estimates from loss prevention experts assume about 10% of all shrink losses come from vendor errors, theft, or fraud. Always check in vendors, watch them closely, and check their billing invoices for accuracy.
- Set up regular inventories and rules. Remember there is a cost in the form of warehousing, damages, receiving, storing, and shrink to keeping large quantities of inventory on hand. You need to balance inventory with sales activity.
- Your trusted bookkeeper is a risk to your business survival. Set up and insist on rules. Review your own bank checkbook and compare your vendor invoices.
- Review your own bank statement.
open and closing your building
- Security experts point out that opening and closing your business are two points in time during which your business is most susceptible to trouble.
- Again, you want to check your bills even after your bookkeeper has set them up for payment.
- Regular Backups
- Plugin limiting the number of login attempts
- Review webmaster tools for strange keywords on your site. A sign of being hacked.
- Security Firewall plugin
- Banking Buddy plugin
Loss Prevention Summary
Thank you for making it all the through this article. I hope you found one or more tips to help save you money. I am listing below some other loss prevention articles appearing on other websites. I hope you will bookmark or follow my site, share on Google Plus and Twitter. I appreciate your support.
Great Loss Prevention Articles: