internal controls

Employees steal more than a billion dollars a week in this country alone. These losses consist of cash, product, materials, supplies and tools. The thief could be your newest hire, your most trusted employee or a relative. Opportunity, not need, motivates most employee theft. Small businesses, such as the kind found in the crafts industry, are more vulnerable than most due to a lack of separation of duties, less supervision and absence of audit trails. If more than yourself is involved in your craft business, then you are already being stolen from. It could be merely a few office supplies being taken home. On the other hand, you could be going bankrupt and not even know it. For the majority of craft businesses, it takes $10 in sales to offset every $1 in theft. We'll do the math on this when we get into the section on margins.

As the saying goes: the best defense is a good offense. Being aware of the potential for theft, and exercising some common sense in the division of duties will go a long way toward curbing many of those ad hoc opportunities. We're not talking security cameras, polygraph tests, vaults, airport style metal detectors or armed guards here.

For starters, keep your materials and supplies locked up. Even if it's just a closet with a lock on the door. Don't leave the keys lying around. If you have more than one employee, designate one person to be responsible for issuing stocks. Keep a clipboard hanging from a nail on the wall and make certain that receipts and issues of significant items are written down. It's surprising how a little thing like a check in/check out sheet will be perceived as a solid internal control. And that designated employee will be infused with responsibility.

Above all, watch the people who handle your money. Never give your bookkeeper or office manager check signing powers on your bank accounts. As the principal/owner you should be the only one with the authority to sign checks; and don't make the mistake of leaving behind signed blank checks during an absence either. Others can write the checks for you, but they should be given to you for signature, along with supporting documentation validating the payment. Examples of the latter include an original invoice with the receiving paperwork attached, or pay stub information to substantiate a payroll check. Never let the person who writes the checks reconcile the bank statement. If you don't have a large enough office staff, and who does, then learn to do it yourself. Literally thousands of business owners have discovered a check register entry to the ABC Supply Company with the real payee on the face of the check being My Bookkeeper. This is the simplest form of embezzlement there is. The person who makes your bank deposits should be different than the one who posts the details to your accounts receivable register. Count and reconcile the petty cash drawer yourself. Your accountant can review your operation and recommend a specific package of cash controls tailored to your needs.

Are you getting paranoid yet? Don't be. It's sufficient to hire right, i.e., check references, track inventories, make your employees aware that you take loss prevention seriously, and distribute the handling, control and accounting for your cash. Most employees are honest and have a high degree of integrity. Capitalize on that by minimizing the opportunities they have to engage in casual theft. When you do suspect embezzlement, theft or pilferage, don't freak out. Review the situation and evaluate it's seriousness -- a tablet of paper or missing box of paper clips is not really cause for alarm. Instead of confronting the suspected "perp" immediately by yourself, I recommend talking with your accountant and/or lawyer to determine how best to proceed. If you make an error in judgment here, you could end up working for your falsely accused employee after his case is settled in court.


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