Prevent Employee Embezzlement, Part 3
Originally published: 11.01.14 by Ruth King
Don't let material theft happen to you
If you're like most HVACR business owners, you watch your cash. You want to know how much is in your checking accounts, what bills are due and what you can expect to receive in the next week. You're concerned about cash theft and have put the processes in place to keep the honest people honest (see my columns in Sept. 2014, pg. 8 and Oct. 2014, pg. 16 for many of the procedures).
You sould also be concerned about material theft. It's demoralizing to come to the end of your fiscal year, take a physical inventory count and discover your actual inventory is $10,000, or even $50,000, less than the value stated on your balance sheet. That loss goes directly to your bottom line (it's subtracted from net profit) and could make the difference between a profitable year and a year you lost money.
It's much easier to steal materials than cash. If you have a warehouse supermarket, you're essentially saying, "come steal from me." A warehouse supermarket occurs when employees can take any materials for their jobs they desire and no one controls what they can take.
Lock your warehouse. Limit access in it. Assign only one person with responsibility for materials. This is one person who you can point to if materials are disappearing. (For a free copy of an inventory form technicians can sign acknowledging responsibility for truck inventory, visit the Download Center at www.hvacrbusiness.com).
It's easy to steal materials. I listened while a manager explained to the owner of a company how easy it was to steal. And, he told him how they did it. Yet, the owner still didn't believe people were stealing from him! They were.
How did they do it? They added materials to job cost. The installers added $20 to $50 of materials to each job. Those materials were job costed against the job but were not used on jobs. The installers took them home and used them as they saw fit. That $20 to $50 on each job adds up. You've spent thousands of dollars that are going in the pockets of your installers.
To prevent this from happening, each job must have an equipment
material list created by the person who sold the job. Installers cannot decide what should be used on that job. The warehouse supervisor puts the parts required in a specific place in the warehouse, along with the list. When it's time to install that job, the installation crews pick up the materials and sign off that they received all the materials. If something else is needed, there must be justification to get the additional materials.
Service technicians have standard inventory on their trucks. They acknowledge and sign off that they have the materials listed on their truck inventory. Materials are replaced from service tickets. Many software packages can create a list of parts needed to be replaced automatically, as long as your employees enter the materials technicians used on service calls into the computer. If parts are missing, they're responsible for paying for those parts.
If your warehouse is locked up, you have cameras in your warehouse and you use material lists, people can still steal. You catch the theft by reviewing your financial statements every month. The signs are increased material expense and decreased gross margins.
Here's what happened in one company where the gross margins were usually consistent and tracked each month.
The first month material expense was higher than expected, we thought there might be some materials that were expensed in that month rather than the month in which the work was performed. We checked job cost. It wasn't. We decided to wait until the following month to see what the profit and loss statement reported as material expense. It was still too high the next month. Job cost was still correct. My conclusion was someone was stealing from the company. The owner said it wasn't possible, because there were cameras in the warehouse.
The next month, unfortunately, I got an email: "You were right." The owner discovered there was one place in the warehouse the cameras didn't reach. This place was right by the back door. Former employees were putting materials by that door and taking them out at night. They had even cut a hole in the chain link fence to get the materials out. These employees were arrested.
Inventory is a bet. You spend your hard earned dollars on the hope you will be able to sell those parts and equipment. Track it. Lock it up.
If you ignore locking your warehouse and limiting access to it, don't use material sheets and don't make your technicians responsible for the inventory on their trucks, you're inviting theft. Control your materials and material expense and you will save your hard earned cash.