October 7, 2008

Keeping Your Money in Your Business

By Paul Bieber

FRAUD. The single word that scares business owners more than any other. You can control purchasing, labor, even customers. You only spot fraud after a loss has occurred. As you take measures to prevent fraud, you never know if they are successful, as you hope there are no problems in your company in the first place. There are many easy-to-implement fraud controls you can put in place that are sound business practices. Let’s look at a few that every glass shop should implement.

The single most important control is to enforce that any employee who handles financial information, and especially cash, must take their annual vacation. A bookkeeper who insists that no one can do his/her job, and doesn’t take a vacation, is becoming your silent partner. Bet on it.

You, as the owner or manager should sign every outgoing check. Time consuming–yes–it is worth it. Not only is this rule #2 in fraud prevention, but you will know more about your business than you every thought possible. When I worked at Floral Glass in New York, either the President, Chuck Kaplanek or myself hand signed every check. This would take two-to-three hours twice a month, but it was worth the effort. We spotted problems early on; we prevented fraud; and all of our employees knew there was no way to hide a problem, so we worked them out rather than burying them in another purchase order. If you use a payroll service to prepare checks and they are presigned, then look at the register that comes from the service and scan each name and the amount of the check. If you don’t recognize the name, ask. If someone has earned more than you expected, ask.

Every check written should have back-up documentation–the invoice from the vendor, the packing list from your receiving of the product, and a sign-off that the received goods are correct and usable. If you don’t recognize the vendor name, stop and find out who they are. You must know every vendor. One of the most common fraud tricks is to create a dummy vendor, and process checks to them as normal business.

Never let the person who prepares your checks balance the checkbook. Even if you have just one person in your office, do the bank reconciliation yourself, or have your accountant do it.

If you use your credit card to purchase company goods, take a hard look at the monthly statement. If you use electronic payment for bills, then have your bookkeeper prepare the list of payments for your approval, and when you are ready to have them input to your bank, sit with your bookkeeper for five minutes and have all of the input done at one time. You should keep the password to yourself. You are saying, why should I do this when I have hired a bookkeeper? Just like your parents told you when you were a kid…because I said so. You reserve the final sign-off on all quotes for yourself, cash flow is just as important.

There is a line between your installer doing a good job and earning a tip, and doing extra work that should have been billable through your company. This is the hardest fraud to detect. You can look at the supplies used for a job, you can look at time sheets, and you can make follow-up phone calls inquiring if everything is OK with the work your firm did. About the only way you will really know this one is for your customer to call up and say they wanted more work done at the cash price, or they have a complaint about the work or the installer.

Teach each and every person in your firm that doing extra work is immediate cause for discipline, up to and including termination. Explain that if one person does this, they are stealing from all the other employees as well as the company. Don’t back-down on this one if you find your best installer is your partner for a few minutes every day. If one person gets away with this, and you don’t react, every work crew you have will be doing this real soon.

Just about everyone takes credit cards. The most common fraud here is giving credits. An employee swipes their own card, or an accomplice’s, and issues a small credit to their own account. Credit card merchant statements are tough to read. Have your bookkeeper highlight every credit on your monthly statement and give you the back-up paperwork why a credit was issued. This also helps you understand where problems occur and a customer is asking for a refund.

You can buy a simple cash register at your office supply vendor for a couple of hundred dollars. Insist that all transactions get rung up and a receipt be given to each customer. Follow this yourself and set the example. If an employee sees you putting some cash in your pocket, they will feel they can also. I know…some people creatively handle their cash transactions. Just don’t do that in front of your staff.

Next week we will talk about other fraud detection and prevention ideas.