Did you account for losses due to shoplifting, fraud or theft while drafting your business budget? Probably not, and yet 7% of annual revenue is lost on average through these crimes. Considering that 95% of businesses experience some sort of theft and 33% of all U.S. business bankruptcies can be blamed on employee theft, this issue is not something small business owners should ignore. Once you discover the impact business theft can have on your bottom line, it’s clear that a business security system can easily pay for itself by preventing theft or aiding in theft recovery
Small Business Losses to Shoplifting
According to the 2018 Sensormatic Global Shrink Index Report, shoplifting accounts for 35.55% of losses in businesses of all sizes. Shoplifting occurs when a customer walks out of the store without paying for an item. They may conceal the item under their clothing or in a bag, rip off tags to make it seem like the item isn’t from the store, or fail to ring up an item in the self-checkout lane. In fact, 58% of shoplifters surveyed by the Loss Prevention Research Council (LPRC) said it was “somewhat easy” or “very easy” to shoplift via self-checkout by either not scanning items, switching labels or tricking the scales.
Even if your small business does not have self-checkout kiosks, you can still be at risk for shoplifting. Anti-theft technology, such as electronic article surveillance (EAS) or surveillance cameras, can deter some shoplifters, but no survey respondents reported that these measures deterred them. A full 44% of respondents admitted to being so motivated to shoplift that they resorted to violence in order to do so, but another 44% said watchful employees would deter them.
The LPRC notes that shoplifting is often connected to the opioid crisis, with 33% selling items directly to drug dealers and 58% selling items to pawn shops for cash. Because 94% of shoplifters target items they believe they can resell, small business owners should organize their inventory accordingly, keeping high-value items under lock and key, behind the counter or at least away from the exit.
Small Business Losses to Employee Theft of Property
Unfortunately, retail businesses also need to be aware of theft perpetrated by employees, which accounts for anywhere from 28% to 33.2% of inventory losses in businesses of all sizes. Hiscox reports that 11% of employee theft involved an employee stealing company property or the property of customers and fellow employees. The other 89% involved some stealing funds through fraud or embezzlement.
A 2014 survey of 2,050 tech employees in America found that 21% admitted to stealing property from work. Of those who self-reported their theft, 66% said they stole items worth $19 or less. However, men were more likely than women to steal items valued at $100 or more.
Small Business Losses to Fraud and Embezzlement
Non-retail businesses may not be the victims of shoplifting, but they can still experience crippling losses through employee theft and fraud. Embezzlement — defined by Investopedia as the misappropriation of funds entrusted to an employee by an employer — is the most common method of employee theft, according to Hiscox. The employees most likely to commit embezzlement work directly in the financing or accounting department (33%) and hold at least a management position (85%).
Small businesses are at particular risk for embezzlement — they lose about twice as much money to fraud compared to companies with more than 100 employees — because finances are often handled by one person. Without anyone else checking the accuracy of the financial statements, it’s easier for someone to commit this kind of employee theft. However, Hiscox found that 79% of embezzlement schemes involved more than one person, so simply adding another person to the finance department may compound the problem rather than resolve it.
Hiscox’s 2018 study found that billing fraud was the most common form of embezzlement in businesses of all sizes, accounting for 18% of cases. The second-most common form of embezzlement involved stealing cash on hand for day-to-day operations (15%), while 9% stole cash collected from customers or intended as employee tips. The Association of Certified Fraud Examiners (ACFE) found that 89% of embezzlement cases fell under the umbrella of asset misappropriation, but they resulted in the smallest amount of money stolen. The most significant median loss — $800,000 — was attributed to financial statement fraud, which accounted for only 10% of cases.
There’s conflicting data on whether men or women are more likely to commit embezzlement, but the ACFE did find that the amounts embezzled by men were 75% larger than the amounts embezzled by women. In terms of industry, the lowest median losses were reported by organizations in the education sector ($68,000) and the highest were reported in the communications and publishing industry ($525,000).
The ACFE also found that 42% of small business embezzlement occurred due to a lack of internal controls. To combat this, small business owners can hire a third-party accountant for spot-checks to quickly catch an issue. In addition, an anonymous tip line can cut losses by 50%.
Small Business Being a Target of Theft
Employee theft is surprisingly common, but just how often do non-employee thefts occur in small businesses? A 2016 survey by Insureon found that 8.8% of 1,002 responding small business owners had experienced a theft or burglary in the last year. However, not all of the respondents reported the incidents.
According to the FBI, businesses are less likely to be burgled compared to residences. In 2019, 5% percent of burglaries occurred in commercial or office buildings, 4% occurred in rental storage facilities, 2% occurred in specialty stores, 2% occurred in restaurants and 2% occurred at construction sites. Department/discount stores, discount stores, places of worship and hotels/motels experienced 1% of burglaries each. Another 2% occurred in a parking lot or parking garage, but it’s not clear whether these burglaries took place in residential or commercial areas.
According to the 2018 Sensormatic Global Shrink Index report, the items most likely to be stolen from retail stores included those relating to fashion, including cosmetics and jewelry, as well as consumer electronics from brands such as Apple, Samsung and Sony.
In addition, Hiscox found that businesses with 100 employees or fewer were the target of 70% of check fraud theft cases, which occur when customers write checks that cannot be cashed.
Small businesses often become embedded in the local community, and that can make it easy to trust everyone who comes through your door — or who works for you — to behave like a friendly neighbor or member of the family. It’s wise to have a healthy dose of skepticism as a small business owner. Investing in a business security system and maintaining a strong employee presence on the floor can help deter shoplifters, whereas internal audits and a tip line can nip embezzlement in the bud.