Trending Financial Data To
Detect Inventory Shortages and Shrink

  This example can be used conceptually for any facet of the business and, most probably, you are already doing this. 

With enough history, a business manager knows that there are cyclical peaks and valleys that could be represented as in the chart above.  Sales peak in February, fall in March and April, and begin trending back up in May.  Regardless if selling shoes or the chart represents components or parts shipped internally, this graph represents a method of trending your inventory dollars.

This chart represents the cost of goods brought into your inventory.  As with sales, your inventory purchases ebb and flow with a general parallel consistency as your "sales".  To maximize profit you want to keep the "right amount" of inventory in the system.

This chart overlays the two graphs to show the sales on the upper portion of the graph and inventory on the bottom.  Notice that the amount of inventory needed to support sales tracks fairly consistently.  However in 2006, while the sales were following their usual cycle, the inventory begins to spike in March and peaks in April when there is normally a down turn in business.  Now there can be numerous reasons for this such as order errors, anticipation of new business, etc., however once having eliminated business factors as the cause, you must begin to look elsewhere.  A quick visual review of on hand inventory may reveal immediately that the increase cannot be anything other than theft.

Few managers are going to convert their P&L to graphs to understand their business trends so let's take the visual representation and put some real numbers behind it.

                                                                              Your Profit and Loss Statement

The above is a typical arrangement of financial data that compares this year's performance to last year.  These figures show a slight decrease in sales in February.

Here are some comparative examples that do not involve the purchase of tangible merchandise, parts, components, or product:

• Your advertising expense increases yet you have not added any new channels. (Creation of bogus invoices.)

• Your payroll expense increases yet you have no new employees. (Ghosting (false) payroll.  Checks are being stolen.)

• Commissions have increased without the corresponding sales increase.  (Usually collusion between sales person and accounting).

• Business travel expenses charged on credit cards has increased.  (Personal expenses being also charged.  Booking co-workers flights to obtain Frequent Flyer miles).

• Your expenses for postage/shipping have increased.  (Someone has set up an eBay shop and you're paying for shipping goods to their customers.)

                                                                                        Looking For The Spike

In simple terms, we are looking for unusual growth in the cost of running your business.  These can occur gradually or spike in a short period of time.  These trends can sometimes be pinpointed to the hiring of a new employee however, most are not that easy.

In our example, comparable sales were up 9% and the inventory that was purchased was up 11% over the prior year.  The sales and inventory growth was within 2% which is fairly common.

February is normally a slow sales month and, in fact, was less than the prior year.  Our comparable sales were a -3%.  Inventory purchased however grew at 11% and that was on top of 2% carry over from January.  The Year to Date (YTD) sales, through February, are up 3% but the inventory has grown by 11% over last year, an 8% differential.  What would cause the spike in February sales v. inventory?

That question must be answered by each business.  Making sure your expenses are in line is a basic tenant of a successful business regardless of business sector.  The primary sign, however, is that the cost of doing business is exceeding revenue.  That means you are making little or no money.  The cost increase must be investigated to determine a legitimate basis for it.  Once all those have been eliminated (such as it is actually there), one could assume it is theft.

In March sales and inventory purchases normalize but still there is a wide variance between the two numbers. 

All businesses should be reviewing expenses, bank activity, and alike but seldom are they seen as a possible reflection of employee theft.  In this example the activity clearly occurred in February.  Unfortunately, by the time your month is closed out, the perpetrator has quit and you are left to reconstruct the paper trail.  The Year to Date figures are more inclined to show a pattern developing.  An employee's confidence builds with each theft and can continue indefinitely if they don't get greedy and keep their activity under the radar.  Unfortunately (or fortunately) their thefts grow both in amount and in scope and the YTD information becomes critical.

Below is a Larson cartoon I found a long time ago that tells the whole story with just one sentence.