4 ways to prevent it from destroying your profit margins
You've probably heard that most small businesses fail within the first five years. This sobering statistic may make you reconsider owning and operating a small business, but many of these businesses fail for entirely preventable reasons. Small business owners often fall victim to fraud that costs them a great deal of money, something new companies can't afford to lose. Fraud prevention practices, however, can prevent the problem entirely, or, at the very least, mitigate the monetary damage.
Payroll Fraud
While most small businesses would like to believe that their employees are on the up-and-up, operating on the honors system simply does not work. According to a 2013 study, about 27% of businesses are the victim of payroll fraud. Payroll fraud is so prevalent because it is just not preventable. You have to entrust your payroll with an employee, and whether you like it or not, they can steal at any time.
For fraud prevention purposes, experts suggest reconciling your payroll at least once a quarter, if not monthly. The reconciling should be done by an individual other than the one who routinely works with the payroll. Choose an employee you trust, an outside firm, or a trusted accountant to do all reconciling.
Hiring your Friends
Friends and money don't mix. While it might seem like a good idea to hire a friend or a relative of a friend for your business, experts advise against it. While we aren't suggesting all, or even most, people will take advantage of a friend that hires them, it has been known to happen.
If you hire a friend to work for you, whether in bookkeeping or on a specific project, experts suggest you avoid giving them more authority or responsibility than you would any other worker. You should continue to reconcile any books they are keeping. The friendship must stay separate from the business. This will help you avoid falling victim to fraud because you trusted a friend to do the right thing.
Preventing Check Forgery
It might surprise you to find out that check forgery is incredibly common in small businesses. Check fraud, a form of asset misappropriation, happens when an employee writes a check intended for a vendor for themselves. An employee may write out similar checks and appropriate them under the same memo tag. When this happens, the business owner may look over the books, and think everything is okay, but in all actuality, fraud is occurring.
To avoid this issue, business owners should consider keeping a running tally with the vendors they work with, including invoices and payments made. By doing so, it is easy to see how much money is owed to each company. Any overage should be investigated, and these invoices should be reconciled either monthly or quarterly by the business owner or an outside accountant.
Maintaining Internal Controls
Most small businesses run into fraudulent activity when employees figure out there is no one checking and double-checking their work. To avoid fraud entirely, or to minimize its damage, experts advise all small business owners to maintain internal control. You may keep this control by having multiple employees check and reconcile files, or by simply taking control of approving all cash expenditures. You may want to speak with a business consultant to discuss your options and how to create a workflow that best works for you and your business.
Small businesses must operate on a tight budget for the first several years to ensure success. Most business owners are aware of this, but many don't realize just how failing to instate fraud prevention procedures could cost them their business. The tips above are a starting point for all small business owners, but we encourage you to explore all of your options and speak with a business consultant.
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