forensic accounting exposes internal theft

Few in business want to admit their employees are ripping them off. But they are. The international auditing firm Bevinco has determined that bars and restaurants lose a staggering 23% of their inventory to theft in one form or another. Now in a down economy, recouping those losses has become of crucial importance.

Fortunately, operators are capable of analyzing their bars with forensic-like precision, which has given rise to the concept of variance management. Simply put, it’s the comprehensive initiative aimed at narrowing the gap between what’s sold and what’s depleted from inventory. The more adept management becomes at shrinking variance, the more financially stable the operation will become. If you’re intent on staying in the food and beverage industry for the long haul, rendering variance a non-issue is a necessity.

One of the most expensive fallacies about operating a bar is the belief that pour cost detects bartender theft effectively. Determining your liquor, beer and wine cost percentages are a fundamental business practice and essential to determining operating margins. However, while tracking your bar’s combined pour cost accomplishes a number of important things, uncovering whether you’re getting ripped off isn’t one of them.

In fact, a savvy bartender can steal cash and inventory all night long and make it seem as if your cost percentages actually are dropping. Pour cost measures the change in inventory levels between one accounting period and the next and compares it with the gross sales that the product in question generated. Bartenders can cover up their theft and leave pour cost unaffected if they replace the stolen inventory with an equal volume of water or smuggled goods.

Forensic Accounting

Another costly misconception held by bar owners and beverage managers is that direct supervision is the way to best thwart bartender theft. Actually, you could erect a lifeguard stand at the end of your bar and still not catch them in the act. Most behind-the-bar schemes involve misdirection and sleight of hand, making them challenging to detect even when watching the bartenders in action. Only the most brazen of scams are committed in the open.

Slamming the door on theft begins with conducting a variance report. It involves determining the amount of product depleted from inventory over a period of time and comparing it with how much was recorded as sold. It works like this: A physical audit of the inventory establishes how much product remains on the shelves. Subtracting that figure from the combined beginning inventory plus purchases determines the amount of product used. Offsets include inventory depletions attributable to spillage, transfers and complimentary drinks.

During the same period of time, the bartenders enter sales information into the point-of-sale (POS) system. Variance is calculated by subtracting the amount of product recorded as sold from what actually was depleted from the inventory. The best-case scenario is for both quantities to be the same. A negative variance indicates more product was depleted than sold and represents the losses attributable to theft. Conversely, if your calculations determine that more product was sold than used, the likely explanation is that the staff is tampering with the inventory.

A pioneer in variance analysis, Bevinco uses an efficiency rating for their clients based on variance. Essentially, the narrower the gap between the amount of product used and product sold, the higher the operation’s efficiency rating. Optimal efficiency means the bar is recouping every ounce of profit possible from the inventory it purchases.

Scrutinizing beverage sales is another important aspect of shutting down theft behind the bar. While there are a number of ways to analyze revenue, none have farther-reaching implications for the beverage operation than tracking bartender productivity or sales per hour. Productivity is calculated by dividing a bartender’s gross sales for a shift by the number of hours he or she worked. One benefit of tracking productivity is identifying those on staff with the highest hourly sales. In addition to meriting recognition, your top earners deserve first shot at the busiest, most lucrative shifts.

On the flip side, a bartender with chronically low sales per hour warrants close scrutiny as the explanation often indicates a problem. The individual may make lousy drinks, so customers leave without ordering a second or third lousy drink. His attitude could be so off-putting that people don’t stick around for the abuse or perhaps he works too slowly and can’t physically keep up with demand. Then again, low sales per hour could mean that the bartender is ripping off the house.

How do you know which it is? If the first four reasons don’t fit, the only remaining explanation is the person is stealing from you. Each dollar diverted from the till negatively impacts their sales per hour. Regardless of the scam, theft will take a toll on productivity.

Old School

One reason why behind-the-bar schemes are so effective is that most bartenders conduct themselves professionally. Faced with the same opportunities to pad their income, they choose instead to look out for the best interests of the house and perform their jobs sans a hidden agenda. Paradoxically, it’s the ethical behavior of the majority that obscures the actions of the few, making it harder to diagnose the problem. There are field-tested defensive measures managers can implement designed to make it riskier for bartenders to steal cash and product. “Old school” tactics include:

Pulling cash drawers. Bartenders often stash stolen cash in their cash drawers. Closing out the POS immediately at the end of a shift and removing all of the cash drawers will force them to risk withdrawing the cash while people are still milling about instead of the privacy of closing. Bartenders also should be prohibited from checking out their own cash drawers for the same reason.
Tip jars. Bartenders should be prohibited from taking money out of their tip jars while on duty. If they’re padding the cash drawer with stolen funds, the money is all too easily retrieved under the pretense of making change.
Maintaining control. Running a bar requires maintaining a significant investment in liquid inventory, liquid assets that can disappear at an alarming rate. To remain profitable, you need to know what inventory you have, what you paid for it, at what rate you use it and where it is at any point in time. It requires accurately tracking inventory from the moment it comes through the back door until it’s depleted.
Physical audits. Auditing a bar’s inventory is exclusively a management function. A bartender can take advantage of the opportunity by altering the results. Overstating the amount of liquor on-hand essentially will have the same effect as if the theft never occurred.
Fast and loose. There’s no more fundamental form of loss prevention than ensuring your bartenders are pouring the proper portions. The problem is that lax or nonexistent controls invariably lead to bartenders over- or underpouring liquor. Each is used to stealing from the house and the clientele. Hand-held jiggers are highly effective, yet require training to attain proficiency. Free pouring is stylish and fast, but can be easily abused and inordinately expensive. The answer may be to permit bartenders to free-pour well liquor and jigger calls.

Effectively containing internal theft behind most bars is no easy task and eliminating it altogether unrealistic. Nevertheless, it’s essential to implement an operational strategy aimed at reducing its impact on your cash, inventory and clientele.