The Unkindest Cut of All
A friend of mine was telling me recently about a woman he knows who owns a couple of successful bed-and-breakfast places. We'll call her Naomi. About three years ago she decided she needed a break from the day-to-day management of the business, where she'd been putting in 55-hour weeks for almost nine years. Both B&Bs were doing well and had general managers she trusted completely. The time seemed right to let go.
So she did. For the next two years, Naomi had a wonderful life. She traveled. She got married. She devoted a lot of time to recreation, hobbies, and charity work. Once a month, she would sit down with the general managers to talk over business issues, and occasionally she'd drop by her establishments to have lunch with the staff, but by and large she left the company alone. Everything seemed fine, and she was happier than ever. Why mess with success?
Then, about a year and a half ago, she began to pick up murmurs of problems at her largest B&B. One of her most loyal employees, the head housekeeper, told Naomi that she'd heard disturbing things from close friends of hers who worked part-time at the front desk. A couple of the people there weren't honest, they'd said. Naomi spoke to the B&B's general manager, Janice, who dismissed the report, noting that the housekeeper often exaggerated. That was true, Naomi agreed.
But there were other signs. Guests would sometimes check out and call back a couple of weeks later, asking for a receipt, and the B&B would have no record of their stay. What seemed like excessive charges for room furnishings and entertainment appeared on the B&B's credit card. When Naomi checked petty-cash drawer one day, she was shocked to find almost $1,000 instead of the usual $100. Janice said that some people were asking to be paid in cash. "We don't do that," Naomi said and took the extra cash to the bank.
The truth is, Naomi didn't want to know what all the signs were pointing to. She was enjoying the life she had and had no interest in going back to 55-hour workweeks. Besides, she trusted Janice, who was not only one of her general managers but also a personal friend -- or so she thought.
But the evidence kept mounting, and the housekeeper kept insisting. She noted that she had detailed records of the rooms her staff had cleaned. They could be checked against the records of the rooms guests had paid for. Finally, Naomi gave in and did an audit, which took her more than two months to complete. The result: about 30 rooms a month were unaccounted for. That translated into the disappearance of more than $50,000 a year.
The loss of the money was the least of it. Far worse was the sense of betrayal. I decided to trust no one -- which was exactly the wrong response.
Naomi could no longer ignore the evidence. She insisted on implementing new procedures. When Janice resisted, Naomi fired her and began working full-time again at the B&B. It soon became clear that the situation was even worse than she'd imagined. Another employee, caught red-handed, confessed to stealing $30,000 over two years. He said Janice had coached him -- and had walked away with far more money than he had taken.
I know just what Naomi felt at that point. She was devastated. She was angry. She felt betrayed and violated. How could people do that? She blamed herself for allowing it to happen and swore that in the future she'd watch the business like a hawk. No one could be trusted to run it in her absence. From now on she'd be there full-time.
That was my reaction when the same thing happened to me in the early days of my company. I, too, learned that a key manager -- someone I'd regarded as a personal friend -- had been stealing from the company, and the discovery was absolutely shattering. The loss of the money was the least of it. Far worse was the sense of betrayal. I felt completely alone. I didn't know whom I could trust anymore. I decided to trust no one -- which was, of course, exactly the wrong response.
The biggest problem with employee theft is that it often leads you to make bad decisions about your business and your life. The emotions are so overwhelming that you tend to overreact. You can't get back to making good business decisions until you take the emotions out of the process.
The first step is to understand that theft is a business issue and needs to be addressed as such. In most cases, it happens because there's a problem with the procedures in your business. Maybe you've neglected to establish a certain check or balance. Maybe people weren't following the procedures you already had in place. Maybe you just weren't paying attention. In any case, something went wrong. You need to find out what it was and fix it.
You shouldn't stop trusting people, however. Yes, a small number of individuals are thieves. No matter what you do, they're going to look for ways to beat the system, and sometimes they'll succeed. But the vast majority of people are honest. You'll be doing yourself and them a tremendous disservice if you start running your company as if you believe that nobody can be trusted.
That's why you need to have the right procedures. They allow the business to run smoothly and let people relate to one another on the basis of trust, while simultaneously making theft more difficult and helping you nip it in the bud when it happens. Accordingly, one of your major responsibilities as the owner is to check your procedures from time to time, making sure those you have are being followed and looking for new ones you may need. And when you come across something that doesn't make sense, it's important to ask questions.
In my company, for example, there are three people who sign the weekly paychecks. At one point earlier this year those people weren't around, so I decided to sign the checks myself -- which I haven't done in a long time -- simply to see how our procedures were working.
As I was going through the checks, I came to one for $1,100 made out to a driver who has a two-hour run each day. At 10 hours a week, he would be making $110 an hour. That couldn't be right, I thought, and put the check aside. I continued to sign until I came to another check that looked wrong to me: $600 for one day's driving. That would be $3,000 a week, $150,000 a year -- nice work if you can find it. I put that one aside as well.
Out of about 300 checks, I found four that I thought required further investigation. I went downstairs and examined the drivers' backup logs and tickets. Three of the four checks turned out to be correct; the fourth was not. One guy had figured out how to beat our system by putting in duplicate tickets. The scam was costing us $300 a week.
How long had it been going on? I didn't ask or care. I never look back. It only gets you aggravated. Instead, I had a meeting with the check signers and reminded them that their job wasn't just to sign checks. I could buy a machine to do that. They were supposed to think about what they were signing and notice if the amounts didn't make sense.
At any rate, we didn't need a new procedure. We just had to do a better job of following the one we already had.
Clearly, Naomi didn't have the right procedures in place before she decided to step back from her business. If she'd had a simple system for comparing, say, the number of rooms cleaned each week with the number of rooms paid for, she would have caught the problems much sooner than she did. Then again, she really didn't want to know about them, as she herself admits.
Now Naomi is making the opposite mistake. She believes that she can't spend any significant time away from the business without running the risk of having it stolen from under her. Her only way out is to sell it, she says.
Those are her emotions talking. Granted, it wouldn't be wise to become an absentee owner again, but with the right procedures and regular monitoring there's no reason she can't hold on to the business and still lead a full and balanced life. Unfortunately, it sometimes takes a while to learn that lesson. I hope Naomi learns it before she makes another mistake she'll live to regret.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc 100 company and a three-time Inc 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available on-line at www.inc.com/keyword/streetsmarts.
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Prevent employee theft with these strategies from the Association for Certified Fraud Examiners.
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