10 Ways To Detect & Prevent Inventory Fraud/Theft

Businesses are often the victims of inventory fraud. The theft is sometimes as simple as an employee secretly pocketing some goods off of the shelf. Other times, it is complex and well thought out. According to a study, non-cash frauds such as inventory theft accounts for 19% of all frauds in businesses that employ more than 100 employees.

Covid-19 has hindered the ability of companies to exercise oversight as companies are working with fewer employees now. Moreover, inventory frauds are on the rise as well because many managers have to use video calls to oversee operations because of the pandemic. This article will provide you with some inventory management tips to detect and prevent inventory fraud.

What Is Inventory Management?

It is a system process by which companies store and sell goods - raw materials as well as finished goods. Companies have to manage the right amount of goods at the right prices at all times. You might ask, ‘what do you mean by inventory management?’ The process starts from acquiring goods from manufacturers and distributors until the goods are sold to customers or wholesalers. Companies can prevent inventory fraud if their inventory management practices are efficient and effective.

Steps to Detect and Prevent Inventory Fraud

1. Recognise signs and patterns

There are many warning signs you might see if someone is committing inventory fraud. Some of the signs could be missing receipts, an employee buying expensive things, an increase in damaged goods, etc. Once identified, you should investigate the matter and confront the person you think is responsible. If the quantum of fraud is substantial, you should get the police involved as well. Trust your business acumen and instincts to recognise signs and patterns of fraud.

2. Division of responsibilities

Oftentimes, businesses entrust a lot of responsibilities to a person they trust. This move can lead to inefficiency and possibly fraud. Since one person has numerous duties, he can easily get away with shady practices and inventory theft. That is why you must have segregation of duties in the workplace. You shouldn’t allow a person to have two responsibilities that might overlap and create a conflict of interest.

3. Make use of inventory management system

You can take advantage of inventory management systems to detect and prevent inventory theft. So, what is an inventory management system or inventory control system? This system is the combination of technologies used to manage inventory. The tech includes barcode labels and scanners, inventory management software that provides a database for all the goods in inventory, and generates reports and processes for labelling and documentation of goods.

The system helps companies have an organised system that accurately tracks inventory. It helps them know how much inventory to keep, which items need to be ordered, which items are about to expire, etc.

4. Maintain accounts accurately

The inventory count should be accurate on paper. The exact number of items that have arrived should be counted before being stacked. When inventory goes out into production or to the customer, it should be counted. All the details should be entered into the inventory management system quickly. Accurate accounting can help you find discrepancies in inventory and detect fraud in time.

5. Management reports

Managers will be crucial in preventing inventory fraud. An effective oversight in addition to detailed managerial reports can serve your business well. The reports should contain key metrics of the organisation that can help you detect something amiss in your company. Moreover, by pouring over reports of various departments, you can find issues if there is inconsistency in reporting.

Conduct quarterly review meetings with managers to go over the Key Performance Indicators (KPIs). Make sure to include various department heads such as marketing, sales, factory, and financial. Cross-check and verify the information given in the reports to detect fraud.

6. Analyse production yield

Data analysis goes a long way in detecting fraud. The difference between expected output and actual output is called production yield. Given the number of raw materials, labour, and time taken, you can find out how much the resulting output is. If the difference between expected and actual output is too much, someone might be committing inventory fraud in your company. Data is your biggest weapon in the fight to tackle inventory fraud.

7. Use the element of surprise

Conduct surprise checks to detect fraud. Many companies make the mistake of scheduling their checks, and they conduct checks in a pattern. Employees who have been at the company can figure out the pattern and work their fraud around it. Therefore, you should have surprise checks to catch employees who have gotten complacent with their schemes.

According to a report, you can reduce fraud by up to 49% using surprise audits and stock count. Not only that, you can reduce the average fraud duration from two years to one year. You can see how the element of surprise can help you save a substantial amount of money.

8. Automation

Manual processes can increase inventory fraud. Automation can help you detect inventory fraud. It can also help you prevent them in the first place. Consider implementing an automated manufacturing system with your Enterprise Resource Planning (ERP) system. The automated machines these days can figure out the input and output in quick time. Then, your ERP is automatically updated to reflect that. Eliminate manual processes because they are susceptible to fraud and mistakes.

9. Eliminate simple frauds

Companies can work on eliminating simple frauds by following simple steps such as checking belongings before employees leave. This simple policy can save companies a lot of money in the long run. One advantage of this policy is that employees would not commit simple frauds in the first place because they know their belongings will be checked before they leave. Simple frauds can be easy to miss. Leaders and managers need to be active to prevent them.

10. Secure inventory

Do not allow all employees access to the inventory. Only those that need access to perform their jobs should be allowed in the area. Keep the inventory out of the reach of employees that don’t need access. Secure the inventory area by employing security gates with electronic key readers. Place security cameras at strategic places to see and record all the happenings on the inventory area.

Conclusion

Inventory fraud can easily be detected and prevented by implementing simple solutions and policies. However, you should not get complacent at any point in time. The leaders and managers have to keep a close eye on operations and management to prevent fraud. You can follow the steps in the article to detect and prevent inventory fraud.

Also Read:

1) TOP 10 Problems Every Small Business Face (And how to fix them)
2) Secrets to Quickly Grow your Business
3) Tricks to Increase Sales in Festive Season
4) 13 Tips To Save Money When Running A Small Business

Stay updated with new business ideas & business tips with OkCredit blogs in English, Hindi, Malayalam, Marathi & more!
Download OkCredit now & get rid of your bookkeeping hassles.
OkCredit is 100% Made in India.

FAQs

Q. What is the purpose of an inventory management system?

Ans. Inventory management systems help you track inventory from the time they enter your warehouse until the time they go out. They generate reports and give you a bird’s eye view of your operations. They can tell you if you are overstocked when to order goods and any inventory issues. You can incorporate them into your ERP to make better use of them.

Q. How to spot phantom inventory?

Ans. You can detect phantom inventory by conducting physical checks. Count the inventory in person and cross-check it with the inventory on paper. You can use Key Performance Indicators as well. You should investigate if you see that inventory is moving faster than usual, the inventory turnover is decreasing, and other questionable things.

Q. How can I automate my inventory system?

Ans. You can use barcode labels and scanners to automate your stock system. A handheld scanner can input information into the system in real-time. Make your different systems such as ERP, inventory system management, and other software talks to each other.

Q. What are the benefits of automating inventory systems?

Ans. Automation makes your business scalable. As your operations expand, you would need to decrease your reliance on manual processes. Implementing automation systems will increase efficiency and make your operations smoother. They will also decrease human errors and inventory frauds as you will be able to track inventory accurately and quickly.

Q. How big of an issue is inventory fraud for small businesses?

Ans. Non-cash frauds such as inventory frauds are a major issue for small businesses. With the pandemic, businesses are struggling to keep and hire employees, so they are having a hard time overseeing operations effectively.