So far, it’s been an eventful year of historic external pressures for business owners. However, overlooking internal controls can quietly do just as much financial damage. Even after a business endures the coronavirus symptoms of sheltering in place and weaker customer demand, it still needs a prescription for its most crippling internal threat — the employees.
According to the Association of Certified Fraud Examiners, small businesses yearly suffer a median annual loss of $200,000, almost twice the median loss for larger companies.
Internal control weakness was the primary cause linked to small business fraud cases, according to the ACFE’s 2018 Report to the Nations.
To help mitigate the threat of employee error — whether negligence or intentional fraud — we recommend a few quick operational changes to boost your internal controls.
- Issue company credit cards sparingly. Chances are, you’re in growth mode. You’re probably seeking to hire the best talent you can find, as quick as you can. However, pump the brakes on issuing company credit cards to all of those new hires. The more employees with company credit cards, the more exposure you have to potential fraud. We also recommend implementing rules for all employees to provide detailed receipts and record all business expenses.
- Keep a watchful eye on your inventory. If we were to steal — of course we wouldn’t, but if we wanted to — we would do it through inventory. Global employee theft accounts for 28 percent of inventory losses, while the rate for the US is 43 percent, according to 2019 research from Kessler International and CompareCamp.com. The theft isn’t coming from employees slipping out the backdoor with laptops and printers. Actually, 52 percent of employees steal office supplies, such as pens, paper or used the company printer for personal profit, according to Kessler and CompareCamp.com. A typical business loses 5 percent of its revenue annually, which translates to potential global fraud loss of $2.9 trillion.
We recommend designating someone with the responsibility of watching inventory. In addition, we recommend that you build inventory review into your regular daily or weekly schedule. It’s that important.
- Spread financial duties across several employees. You’re asking for trouble if you only have one person monitoring the purse strings. We recommend delegating several employees to be in charge of payments, payroll, bookkeeping and other financial responsibilities. In addition, the person who sets up a vendor shouldn’t also be the one who pays the same vendor. Involving more people in the management equation makes good business sense. By doing so, you increase the accountability and decrease the careless errors or temptation for fraud.
- Keep tabs on debt so you can borrow tomorrow. It’s so easy to become overleveraged when you’re in growth mode. It may help to hire a CPA to set a workable debt-to-equity ratio and debt-to-cash flow ratio. And if those terms trip you up, that’s all the more reason to get professional assistance. You’ll want favorable ratios because banks and investors will want them when deciding to extend credit to you. Business owners often overlook what they should have in place now to grow later.
Obviously, this isn’t a comprehensive, catch-all list to circumvent all risks; you can find countless books, and attend lengthy seminars devoted to the subject. Instead, it’s some simple low-hanging fruit that all business leaders can tackle immediately.
You’re constantly tweaking your business plan and strategy to stay competitive. Don’t make 2020 harder than it already is; put the internal controls in place to protect your hard work.