Protecting your small business

For small business owners, it may be easy to see the external threats to your business: Competitors in your market, disruption in your supply chain, property damage, etc. But it can be more difficult to see internal threats to your business. As busy days take over and the business starts to grow, paying attention to a few key things will save a small business time and money in the long run.

One of the biggest internal threats to business is inefficiency. Inefficiency can lead to lost time, lost sales and even lost inventory. A simple way to protect yourself against this is to create a procedure manual for all key functions of the business. This creates a set of expectations for your employees and lets you focus on reviewing and monitoring the procedures that are most vital to the business. Procedures outlined in the manual should include customer service processes, inventory management and all day-to-day operations. If you don't have an existing procedures manual, take the time to observe and write down the way your business should be running. If you currently have a procedures manual, make it a priority to review the manual once a year to ensure that the manual accurately reflects the current state of your business operations.

In a small business, employees wear multiple hats, touching many aspects of the business. Building definitions of roles and creating a system of checks and balances helps protect your business. Internal communications is something that should also be included in your procedures manual. Being thoughtful about how information is shared among employees, including content, context and timing, is crucial to successful operations.

Once the procedures manual is up-to-date and in the hands of every employee, the business owner can pay attention to a few key areas where major financial damage can take place: cash handling, payroll/payables and inventory management.

Cash handling: One threat to small businesses (that no one likes to talk about) is the risk of embezzlement. A 2016 survey from HISCOX Business Insurance showed that 80 percent of business financial fraud occurred within a small business. While there are many ways to commit financial fraud, one of the easiest is a simple cash grab. Streamlining every cash handling process is a must. The more hands the businesses cash passes through means there is a higher risk of errors or fraud. To avoid this, it is best to add technology that will help reduce the percentage of theft and improve overall efficiency. In retail stores, modern point-of-sale systems are internet-connected and offer up-to-the-minute updates on sales and money transactions, via a reporting dashboard. Having the ability to monitor transactions can act as a deterrent for anyone considering this kind of theft. Regardless of the type of business, conducting regular audits (scheduled and unscheduled) can help prevent employee theft and loss by ensuring the financial records match the receipts and transaction records. Regularly checking financial records will encourage accurate record-keeping. If there is something wrong, you will be able to identify it sooner and take necessary action.

Payroll and payables: Creating a process for double-checking every outgoing check can yield a large savings for a business. Simple steps like making sure each check is made out for the right amount to the right person can help you avoid costly mistakes or misappropriation of funds. Separating the processes of approving payment and issuing the check creates a built-in review system that yields more accurate payments and reduces opportunities for errors and fraud.

Inventory management: Keeping track of inventory is another big step to prevent loss. This includes the products being sold as well as components, ingredients and even office supplies, such as ink cartridges. Inventory loss can occur as a result of misplacing items, theft by employees or product damage resulting from an inefficient storage system. Having a system for managing inventory allows you to know the status of all of your items at any time. Additionally, a streamlined inventory management system will allow you to see which products are selling well and which ones are not. Understanding inventory flow processes will help you keep an eye on slow-moving inventory (which are at higher risk for loss or damage) and also optimize your future manufacturing and orders.

Following these tips will ensure that a small business will be more protected against fraud, resulting in a more profitable and efficient business. Taking the time to review your business structure and processes can save you time and money by protecting your business.

Contact us at the Nevada Small Business Development Center for guidance on how to protect your business. Whether you are just getting started or have been in business for several years, our team can assess your business operations help you protect yourself from internal as well as external threats.

(Editor's note: Rod Jorgensen has been the director of counseling for the Nevada Small Business Development Center (Nevada SBDC) since 1990, located in the College of Business at the University of Nevada, Reno.)