Forensic Accounting Shines Light on Internal Theft

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

Fortunately, operators today have the capability of analyzing their bars with forensic-like precision, which has given rise to the concept of variance management. Simply put, variance management is the comprehensive initiative aimed at narrowing the gap between what’s sold and what’s depleted from inventory. The more adept managers becomes at shrinking variance, the more financially stable the operation will become. If you’re intent on staying in the food and beverage business 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 managing pour cost is effective at detecting bartender theft. Determining your liquor, beer and wine cost percentages is a fundamental business practice and essential to determining operating margins. But the truth is that while tracking the 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 do it in such a manner as to make your cost percentages actually drop. Pour cost measures the change in inventory levels between one accounting period and the next and compares it with the gross sales that product 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 how you 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.

The process of slamming the door on theft begins with conducting a variance report, which involves determining the amount of product depleted from inventory over a period of time and comparing it to 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 depleted due to spillage, transfers and complimentary drinks.

During that same period of time, the bartenders enter sales information into the point-of-sale system. Calculate variance by subtracting the amount of product that is recorded as sold from what was actually depleted from 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 its 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 more far-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 his or her sales per hour. Regardless of the scam, theft will take a toll on productivity.

Old School
One reason 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 defense measures managers can implement that are 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 system 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 should also 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 can disappear at an alarming rate. To remain profitable, you need to know what inventory you have, how much 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 portion control. The problem is that lax or nonexistent controls invariably lead to bartenders over-pouring or under-pouring liquor. Each is used to steal from the house and the clientele.

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. NCB