I would like to start out by telling you that I have over 20 years experience in accounting. Most recently at a very large sales and service company as their controller, at one point I was in charge of 3 stores, having been involved with closing 2 of the stores. I have worked at a small bookkeeping office and 2 different CPA firms. I spent 6 years at a manufacturing firm as their accountant. So I hope you can see why I feel I have the knowledge to help business owners, small and large.
In any size business, large or small, employees are a big asset. They can also make or break a company. You need employees you can trust and that will be there for the long-term, on top of the qualifications that they were hired to begin with. I would like to give you some things to keep in mind when you are at your business and some that will cause a little more work but worth it in the end.
Now I need you to carefully consider what each employee is responsible for. Are they responsible for making or selling something and for handling customer complaints about what they do? By having someone else, or yourself if possible, handle complaints you will be aware of problems before your customer base is affected adversely. If there are ever any complaints concerning money, you must handle these yourself. An employee could be stealing and not recording money. Or a customer could just be trying to pull one over on the company. By you being the only one to handle money issues you make yourself aware, possible the hard way, of current scams, what the people look like in case of legal issues, problems with how the transactions are handled and a lot more. With other complaints you could even find out the employee was trained incorrectly and can be immediately fixed.
There are some people you can trust with your life, but when it comes to your current and future income, all it takes is trusting one wrong person. The chances differ by the business size and how involved you are. Most owners are so busy with running the business they have no choice but to trust everyone they employee. Believe me, you will find out who the bad ones are eventually but I am hopeful that I can help you to catch them earlier rather than later.
You as the owner must set a good example. If you are taking money out of the til to pay for lunch and not recording it, an employee will have an easier time stealing from this same til. Do not take anything home without paying for it or at least putting something in the til that says what you took so it can be removed from inventory. Again this is really more important that you realize so please consider your actions so everything seems to be covered. Even if you do all the bookkeeping by putting the note in the til you make your employees think you know how much of everything you have. Some employees, not all, think if you can take money, parts, etc. than so can they, Yes, I know it is your business and they do not have a right to it, but I cannot tell which employee feels this way and which understands. This alone is a big deterrent for some employees. I could do a complete series on this subject alone but I am sure you get the idea.
If you have Managers that help take care of different departments, you will still need to watch how many responsibilities they have. To help make my point I would like to tell you about something I have been involved in. A Manager for a service department was responsible to check employees hours, hours charged to jobs or to maintenance, write offs, part charges, labor rates, and a lot more. A big part of his pay plan was tied to gross profit (sales less cost of parts and labor) of his department. Since he could change almost everything, not things like utilities, depreciation, he pretty much wrote his own pay check each month. The owner did not want me to check the managers out because they all had been there for over 10 years and he felt he could trust them. He did not hire me for any type of internal auditing.
When this particular manager took a different job and left their employ, he hired a new manager and I helped to make for sure he was trained to do things correctly. The person he hired was a great fit and they received nothing but compliments about him.
I notice a large decrease in gross profit after 3 months for this department. This caused me to go back and compare one year to the next for the same months. I dug a little deeper on expenses that were out of line in each year. But, the biggest thing I notice was the gross profit was much higher in the prior year.
I found that the current year labor expense was 2.5 times higher than the prior year. This caused me to look at what was so different. I interviewed the new manager and found him to be recording the time correctly. So I pulled up job cost sheets for one month, both years. I then notice that on the prior years the job profit was almost always much higher than in the current year, thus leading to a higher gross profit. I immediately could see adjustments made near the end of the month. So I pulled up time cards to match to the job sheets since I knew it looked liked the times were all recorded correctly but later adjusted.
I was finally able to see where each month the prior manager would change time allocated to jobs over to maintenance, and below the gross profit line, ultimately increasing his take home pay. When I took this to the owner he was shocked, we checked all other managers and there was very little we found problems with. Yes this is a form of embezzlement but was it worth the press getting wind of it, probably not and since he was already gone the owner did not want to go that route. We put procedures in place that the owner must authorize any changes with labor and the accounting department will do any adjustments. Also we turned off the ability to be able to see the gross profit for any manager. The Owner also now checks time and expenses billed to maintenance.
By the way he was also lowering the cost for parts thus increasing his gross profit and reducing parts gross profit. Now no one can change anything from another department. Because the expenses were more correct than ever, we adjusted the % the new manager was paid so he now receives closer to what was estimated as the time of his hiring. This made the new manager know he was trusted and the owner was being fair to him. This new manager also knows that the employees were aware of at least part of what was going on and he now must audit time cards daily, because maintenance expense being so high also meant that people were not doing their jobs for a large portion of time and this needed to be addressed. Now the maintenance expense is under better control.
This was a very costly problem that could have possible been avoided or at least minimized. Change is hard for everyone but as you can see some good things can come out of it. This owner is now aware of some of the red flags to watch for and feels more confident that he has the best employees. He also knows he must think outside of the box to make for sure his company’s profits are where they should be and how to investigate if there is an issue.
There are so many other ways for employees to steal, but by being aware, taking necessary steps to separate duties, and limiting employees access , the employee can concentrate on doing their jobs and the company will be safer.
This was a true example of things I have experienced in my different jobs. Do not forget the basic ideas can be applied to many situations, just think outside of the box. Sometimes just being aware that an employee is having financial issues may be enough for you to check things over and proceed with caution. Remember though there are lots of ways for people to come up with to take what rightfully is yours, no one can predict with certainty an employee will or will not steal. No one can tell you all the ways to steal either, so be aware, if something does not seem right investigate. Every owner should know their financial statement inside and out and if a question arises they should be able to find the information needed to verify. I also would recommend having someone do some type of an internal audit, possible once a year. This will help to catch some issues. No one can guarantee they will catch everything! Check your local CPA firms for prices and things they recommend.
For this series I will also be covering Inventory, Bookkeeping, Assets, Small Tools and maybe more. If you would like me to cover other areas please leave a comment below. Also I would love to get any comments or questions you may have, I will do my best to answer them.