14 Steps Toward Better Control of Your Operations
1. Segregation of Duties Sales, cash collection and account adjustments should be segregated wherever possible. Cash deposits should not be made by the individual reconciling the cash account, and accountants should never be check signers.
2. No or Little Control Over Prices This may surprise you, but most companies do not have controls in place to ensure that revenue is optimized. Pricing is often left to the sales associate or sales manager, particularly with outside sales. Without a pricing control system, revenue and margin will fall to the lowest service level. I have interviewed dozens of outside sales associates on a confidential basis over the past few years and almost all could (but chose not to) raise prices. It would seem that a 1% to 2% revenue increase could almost always happen and, in some cases, prices could increase by over 2%. This is even a problem with commissioned associates, as the small commission gains are easily offset by satisfied customers and reduced pricing pressure. I recommend that all bids greater than a certain amount (depending on the size of the business) be reviewed by management before the bid is issued.
3. Price Tags Some states have rules requiring that price labels on items on the hook or on the bin match exactly what’s in the computer system. This can be a legal issue and fines can be levied if audited. When prices are changed in the system, updated tags must be printed and applied.
4. Credit Extension As we suggested years ago, write-offs were bound to happen and this has little to do with the economy! The independent retailer is often the last to continue to extend terms. In many cases, we even allow retail customers to have open accounts. This is one of your greatest strengths (knowing your customer and maximizing revenue) and is also one of your most significant control weaknesses. While the big boxes, and most other large businesses, restrict credit, many independent businesses are experiencing write-offs for the first time. I predict this will continue even if the economy recovers, as our credit extension and control practices must be brought up to date.
5. Free Upgrades Watch your yard carefully, and you might see instances in which loaders are swapping lumber and other building material for higher grades and sometimes collecting “cash tips” for the upgrade. At other times, customers may be doing the loading themselves, making the tip unnecessary. Customers shouldn’t load their own goods. Rather, it should be done by an employee who’s independent of the selling process. Gate-checking or alternative, lower-cost procedures are a must.
6. Special Order, Excessive, Obsolete or Slow-Moving Inventory Many dealers are adjusting inventory in a batch mode over a period of time–sometimes even years. From an accounting perspective, these inventory items should be adjusted to allow for a “normalized margin” and be allowed to convert into cash as soon as the problem is identified. For special orders, this seems like a greater problem where customer deposits are not required. We recommend that special ordering be restricted and customer deposits required wherever possible.
7. Vessels for Theft Dumpsters and vacant lots have been used as temporary storage facilities for inventory that’s been left there to be stolen later.
8. Double Your Money Back Refunds create an opportunity for loss. Every item associated with a refund should be considered for an immediate cycle count to ensure that the refund is appropriate. Credit memos should trigger the same concern and cycle counting.
9. Repair and Maintain Fences and gates should be in good repair, with cameras strategically placed and the angles changed periodically.
10. Self-gifting Since gift cards and certificates are new to our industry, the internal controls supporting them can be weak. Gift cards can be swapped for cash or be improperly issued. Note that gift cards are tightly controlled by mass retailers. We must control them also.
11. Drop Ship Drop-shipped orders (orders shipped directly from the manufacturer/distributor to the customer) are always an exposure. There are cases where drop-shipped orders are handled differently than regular orders because of the lack of receiving documents. This leaves us open to many potential dangers, including theft or simple failure to invoice.
12. Movin’ and Shakin’ Constant movement of goods creates an opportunity for loss. Interestingly, almost all large retail chains control entry, exit and access (such as to high-priced or easily marketable items) for employees and customers. Many independent businesses do not. In some cases, employees have simply loaded inventory into their cars (parked in the yard, no less) and driven away with no record of the sale.
13. Receiving Distributor and manufacturer computer systems are often automated with the retailer. When there is an overshipment, employees can steal the item and there will be no shrink.
14. Free Warehousing Many stores hold special orders for future pickup or delivery. This can extend for months and, in some cases, the sale will be canceled or the goods will be damaged. I recommend that you invoice customers based on availability for pickup or delivery and consider a storage fee (where possible).
