• Derek Carter

Cash is King—Fraud Edition

Overall businesses report losing approximately 5% of their annual revenue to fraud. Small businesses are more susceptible to fraud due to their smaller size and lack of resources to properly implement internal controls to prevent or deter fraud.


There are two types of fraud that occur most often in the small businesses we work with.


1. Theft


Fortunately many small businesses receive the vast majority of their payments via credit card today. Cash sales make up a small percentage of total sales for many businesses, but that doesn’t mean we shouldn’t watch cash sales closely to ensure that money is properly accounted for.


When a sale is made, the point-of-sale (POS) system will log that sale including the payment type. This report should be used to verify that cash taken in at the register was either deposited in the bank or used for business related purposes.


Let’s cover some best practices as it relates to cash controls.


  1. Formally log cash on a daily basis. Document expected cash deposits per the POS and compare that with what is actually in the cash drawer. This log should be completed daily and signed off on by the person performing the task. Ideally, the individual performing this task is not the one responsible for the drawer. If that is not feasible, have a second person review the log regularly.

  2. Once the log is complete for the day, either deposit the cash at the bank or place in a safe. The individual performing this task should be logged.

  3. Implement a formal schedule regarding cash deposits. Ideally cash deposits are done daily. If that is not possible or feasible, select a time frame that makes sense for your business. Keep in mind the more often you deposit cash, the less likely you are to experience theft. These cash deposits should be reconciled to the logs in step 1.

  4. Create as much separation in these processes as possible. The more separation you have the stronger internal controls in place to deter theft.

  5. As a business owner, you should consider periodically reviewing the items noted above. If your team knows you are watching, they will likely think twice before stealing from you.

  6. Avoid taking money from the drawer to pay for expenses. Set up a petty cash fund for any operating expenses that must be paid with cash from time to time. If cash tips are paid from the drawer, these should be documented on the cash log noted in step 1.

2. Payroll


You may be surprised to see payroll listed here. I’ve witnessed payroll related theft on a number of occasions over the years. Most businesses paying employees on an hourly basis have time tracking systems in place, which helps to prevent any fraud related to actual hours worked. This isn’t the fraud I am referring to. I am talking about something more nuanced and much more difficult to identify.


For those of you that use bonuses and commissions as a meaningful percentage of compensation for your employees you are exposed to payroll related fraud. Bonuses and commissions for things like selling products, add-ons, memberships, gift cards, and class size are just a few examples of how employees may be compensated.

How these things are tracked will vary by business. Oftentimes the data is logged in the POS system. For some though, tracking is done manually. Regardless of how you track it, it is important to review the data for accuracy. If your worst performer starts setting records for membership sales, it may be time to look at the details. Do all those new customers really exist? Was cash involved or will they pay into the future?


Pay attention to the performance of your team. If something significantly changes, it likely warrants looking into. If your employees know you are looking at the details, the likelihood of fraud will be reduced dramatically.


Fraud and theft is a challenge for every business. It’s certainly not limited to the theft of cash and manipulating payroll data either. As an owner, take a peek under the covers every so often to ensure everyone knows you are looking. If you don’t have time to look into the details regularly, make sure you have a trusted manager that understands how important this is. And most importantly, if you think something is up and can’t get to the bottom of it don’t hesitate to reach out to a professional that can assist you.



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