Defenses Up!  Are You Doing All You Can to Prevent Fraud?

KEN TORNHEIM, CPA, CFE

As companies globally continue to slog through a challenging economy, they are also fighting the specter of fraud. Here is an eye-opening statistic: A typical organization loses an estimated 5% of its revenue to fraud annually, resulting in total losses of more than $3.5 trillion, according to examiners participating in the Association of Certified Fraud Examiners’ survey of worldwide fraud, 2012 Report to the Nations on Occupational Fraud and Abuse.

The manufacturing industry certainly is not immune: 10.1% of fraud cases occurred in manufacturing companies, accounting for a median loss of $200,000. Unfortunately, your employees are a natural culprit because they have the most immediate access to funds and materials. Fortunately, there are steps you can take to reduce the chances of fraud at your company.

Homing in on Workers

By knowing and empowering your employees, you can decrease instances of fraud. How? First, perform background checks when hiring employees — particularly for financial and management positions. A thorough review can uncover any criminal convictions involving embezzlement, theft, forgery or other fraud.

Second, encourage workers to watch what is going on around them and to alert a supervisor when they believe theft or fraud is being committed. Protect employees who report fraudulent acts by providing a confidential means — such as a toll-free hotline number —to express their concerns.

Finally, ensure employee compensation is competitive. Workers who believe they are underpaid may be able to more easily rationalize committing fraud. Compare your pay rates to others in your industry and ensure that they are competitive.

Turning to Professional Help

Your CPA can be a powerful resource in uncovering fraud and embezzlement. He or she can assist you in creating effective internal controls and help monitor bookkeeping records, invoices, bank statements, payments, journal entries, financial reports and other documents.

Forensic accountants can also be useful. These fraud experts use their accounting, auditing and investigative skills to detect indications of financial fraud. One telltale sign of fraud is growing accounts payable and receivable combined with dropping or stagnant revenues and income. Others may include excess inventory, a large number of account write-offs and increased purchases from new vendors.

A fraud expert will examine your financial statements for these and other dangers as well as assess your company’s culture and business practices to determine what conditions may be causing fraud to thrive.

Enforcing a Fraud Prevention Policy

A good line of defense against fraud is a well-written fraud prevention policy. Explain your company’s code of ethics and include specific rules regarding the use of office supplies and company-owned equipment. Your policy should also spell out what constitutes fraud and how you will treat those caught committing it.

Make it clear that employees caught committing serious infractions will be terminated and prosecuted to the full extent of the law. In addition, state that policy violators will have to repay stolen funds or pay for stolen equipment. Finally, require all staff members to sign an agreement stating that they have read and understood your fraud prevention policy.

Fortifying Your Company Against Fraud

A fraudulent act can have a damaging financial effect on your manufacturing company. There is no way to completely safeguard your company against fraudsters, but empowering your employees to report fraud to management and enforcing a strong fraud prevention policy can significantly reduce the chances of a fraud occurring.

Six Questions For Better Forecasting

ROBERT CRONIN, ASA, CDBV, CMC

Whether you are stocking your shelves or updating your business plan, understanding what lies ahead is an important part of running a healthy manufacturing business. Forecasting key business factors, such as sales demand, operating expenses, receivables, payables, working capital and capital investment requirements, can help manufacturers manage costs, reduce excess inventory and other overhead, offer competitive prices and keep their companies on solid financial footing.

While no forecast is guaranteed, using the right method goes a long way toward getting meaningful results. To help you determine the right forecasting methods for your business, ask yourself these six questions.

1. How far into the future do you plan to forecast? Forecasting is generally more accurate in the short term — the longer the time period, the more likely it is that customer demand or market trends will change. While quantitative methods, which rely on historical data, are typically the most accurate forecasting methods, they do not work as well for long-term predictions. If you are planning to forecast over several years, try utilizing qualitative forecasting methods, which rely on expert opinions instead of company-specific data.
2. How steady is your demand? Seasonality, weather, sales promotions and other factors can cause manufacturers’ sales to fluctuate. For example, if you make box fans, chances are good your sales dip in the winter. If demand for your products varies, consider forecasting with a quantitative method, such as time-series decomposition, which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles. You also may want to adopt forecasting software, which allows you to plug other variables into the equation, such as individual customers’ short-term buying plans.
3. How much data do you have? Quantitative forecasting techniques require varying amounts of historical information. For instance, you will need about three to five years of data to use exponential smoothing, a simple yet fairly accurate method that compares historical averages with current demand. If you want to forecast for something you do not have data for, such as a new product, you will either need to use qualitative forecasting or base your forecast on historical data for a similar product in your arsenal.
4. How do you fill your orders? If you manufacture your products to stock instead of producing them as customers order them, forecasting is particularly critical for managing production capacity needs, establishing accurate inventory levels and improving cash flow. For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as at the local warehouse level, which will help you ensure speedy delivery.
5. How many types of products do you sell? If you are forecasting demand for a wide variety of products, consider a relatively simple technique, such as exponential smoothing. If you offer only one or two key products, it is probably worth your time and effort to perform a more complex, time-consuming forecast for each one, such as a statistical regression.
6. What are your customers like? If you have customers who have a variety of expected delivery requirements or tend to submit large or numerous small purchase orders over the course of the year, then forecasting can also help you better anticipate their needs and manage their expectations.  Demonstrating that you understand your customers’ needs may also help you distinguish yourself from your competitors and strengthen your relationships with your customers.

Plan to Succeed

You may not have a crystal ball, but using the right forecasting techniques will help you gaze into your company’s future with much more accuracy. Your financial advisor can help you establish the forecasting practices that make sense for your business.