Unfortunately, financial fraud is very common in small and medium sized enterprises (SMEs). The main reason has little to do with trustworthy employees; it is instead the amount of tasks an employee is asked to handle. Most SMEs don’t have the capacity to hire enough employees to tackle different tasks, meaning that only a few employees are responsible for doing most, if not all of them. This lack of division and multi-tasking create errors which can result in fraud. However, take heart! There are ways to avoid these problems in SMEs.
The best way to reduce your risk is to develop robust and efficient financial and operational processes to ensure that all transactions are carried out according to a standardized method.
Let’s use placing an order with a vendor as an example.
In nonstandard processes, several things can go wrong when placing orders.
Let’s say a warehouse manager sees that an important stock item is running low, so they look up the vendor and place an order. There is no set up system information, so the order quantity is calculated outside of the system and based on the employee’s experience.
Later that day, the owner sees that same important item is running low, and also looks up the vendor and places an order. Since there is no information in the system, two purchase orders have been created and sent to the vendor by two different people, and neither of them were approved by anyone. When the order arrives, the warehouse can’t find the details in an inventory system. You can see the inefficiency in this process.
Setting up a standard process will resolve these headaches, here’s how you can get started:
Identify your company’s needs (important stock items) via an inventory management system.
Once identified, create a purchase order.
Acquire approval from the appropriate person (usually the purchasing manager).
Send a purchase order to the vendor.
All systems should adhere to a standard process and offer required features and key metrics. For example, the inventory system should be capable of defining minimum and economic order quantities as well as maximum inventory for any given item.
It is very important to create and maintain standard processes, not only for vendors but for:
Payments to vendors
Payments to employees
Collections from customers
Once your standard processes have been defined, the best way to check its efficiency is to make a deliberate mistake to test whether your system will catch it. If it doesn’t, pinpoint which area needs to change and make the changes. If it does catch the mistake, that’s good! However, try to make a few different ones for good measure.
Defining a process will make any entrepreneurs or business owners life easier. If an employee resigns, it will be easier to train someone new to follow a system—you don’t have to be dependent on one person. You will also be able to immediately define where a mistake was made when following a standard process (or, hopefully prevent it). With non standard processes, you end up wasting time trying to figure out what went wrong and at what stage. This takes your mind and flow away from what you’re good at, and where your attention belongs: selling to you customers.
Trusting in a system and a process is much safer and effective than relying on people to catch every mistake and prevent it. When everything works together and operates in organized harmony, everyone is happier.