Learn Loss Prevention Strategies for Business

Learn about loss prevention strategies to protect your business and reduce the amount of loss your company experiences.

By Brad Nakase, Attorney

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Have a quick question? I answered nearly 1500 FAQs.

What is loss prevention mean in business?

Loss prevention is a strategy a business implements as part of an overall security management plan and is designed to reduce a business’s losses from theft, fraud, and operational errors. Loss prevention is a risk assessment aiming to maximize a business enterprise’s profits by better managing preventable losses. Retail loss prevention is a set of practices employed by retail companies to prevent inventory loss and preserve profits.

Creating a Loss Prevention Strategy for a Business

In the business world, loss prevention is defined as when an owner takes the necessary steps to reduce profit loss. To fight profit loss, a business owner should first understand the most common causes of the phenomenon. These reasons include supplier fraud, internal and external theft, inventory shrinkage, and administrative mistakes. In this article, our California business attorney in San Diego will discuss how best to prevent profit loss, including strategies such as retail security, staff buy-in, and correct cash handling.

Why Is Loss Prevention Important for a Business?

Loss may also be referred to as shrinkage, which reduces a business owner’s profits. In serious circumstances, it can cause problems that may threaten the business’ health. Losses can occur in any industry, but it is especially important to prevent loss in retail. If shrinkage becomes a big problem for a retail store, then an owner will have to raise their prices, which can cause damage to the company’s relationship with customers. Worse, a store may find it hard to pay its employees, buy inventory, and cover rent. For businesses with low-profit margins, such as grocery stores and liquor markets, the risk associated with shrinkage is very high.

It may therefore be a good idea to invest money and time into loss prevention. Over time, this can lead to greater profits and increased business growth. Directly combating loss can have other benefits for a business that go beyond protecting profits. For instance, if a business owner discovers that internal theft is a recurring problem, he or she can improve training or install security cameras by the cash register and company safe. On the other hand, if administrative mistakes are causing loss, then a business owner can invest in better software.

How to Identify Reasons for Retail Loss

It is important to educate oneself in the different kinds of loss in order to prevent them from happening. Having a good understanding of how loss occurs can help a business owner decide on a strategy to combat the problem.

Loss can happen by accident or as the result of a purposeful action. An example of deliberately caused loss would be theft and fraud. Administrative errors, such as software malfunctions, can cause unintentional loss.

Internal Theft

Internal theft, otherwise known as employee theft, occurs when an employee takes money or property from the business owner without permission. Internal stealing is actually remarkably common. Employees are 15 times more likely to steal from their company than outsiders.

External Theft

According to a National Retail Federation study, external theft is the culprit behind almost 37% of shrinkage. The primary forms of external theft are organized retail crime and shoplifting. Organized retail crime (ORC) is an intentional kind of theft perpetrated by two or more individuals. Shoplifting, on the other hand, is when an individual steals while behaving like a customer. It can be either planned or in-the-moment.

Employees should be made aware of return fraud, which is when a shoplifter steals an item before returning it to the store in exchange for cash.

Suppliers Fraud

There are different kinds of supplier fraud, which may also be known as vendor or procurement fraud. An individual may pretend to be a legitimate vendor in order to receive payment, then disappear without explanation. Also, an employee of a legitimate vendor may wrongfully increase the cost of services and goods, taking the difference for themselves. Vendors can also sometimes use extortion or bribes to take advantage of clients.

Administrative Mistakes

The reality is that sometimes people make mistakes, even experienced administrative employees. Also, outdated software can cause errors. These kinds of administrative errors make up 19 percent of retail loss. Administrative errors may be the result of overwork, poor training, or carelessness. Examples of administrative mistakes include overpaying vendors and mispricing goods.

Best Loss Prevention Strategies

There is no way to prevent profit loss entirely, but the following prevention methods can help a business owner reduce shrinkage. In the long run, these small steps can make a big difference.

Handling of Cash

While it has become popular among customers to pay using credit cards and payment apps, many consumers still prefer to use cash. In retail, unfortunately, this provides ample opportunities for employees to take cash from the register or miscount money.

Therefore, it would be wise to install an automatic cash handling system which will reduce the probability of errors or stealing. For instance, a currency counting machine counts cash for the retailer and is much faster and more accurate than a human.

A cash recycler is another great choice, because it keeps cash secure after counting it and making sure it is legitimate. It will dispense money, keep track of the amount given out, and calculate the amount that remains.

If a business owner chooses to invest in cash handling equipment, he or she should be sure to instruct employees on how to properly use it. In order to avoid theft, a business owner should ensure that cash is kept secure at all times.

Physical Location Security

It is important that a business owner take steps to secure their physical store location to reduce both internal and external theft. Depending on the size of the business, an owner may choose to appoint employees to prevent shrinkage or otherwise hire a loss prevention contractor.

The following are a few ways in which a business owner can secure his or her physical location:

  • Make sure that the store is lit well, with no dark areas where shoplifters can discretely steal merchandise.
  • Have as few exits as possible; it is easier for employees to monitor shoppers this way.
  • Position shelving to allow employees to have a direct view of the entrance.
  • Install security cameras to deter thieves.

Product Security

It can be a little difficult to keep products safe while not discouraging sales. Luckily, there are some security solutions that can help find a happy medium.

One popular method used to secure merchandise is electronic article surveillance, where a business owner can attach security tags to goods. When the item is sold, the cashier will deactivate the tag. If the tag is not deactivated and the item moves outside the store, an alarm will sound. This kind of system uses electromagnetic, acousto-magnetic, or RFID scanners to pick up the tag when it crosses the door threshold. RFID has recently become popular due to the tags containing an identification number. If an item is stolen, then the shop owner can identify which product was stolen.

Another security method is having a locked display case for expensive items, such as electronic or jewelry. However, a business owner should make sure that customers can still see the products inside the case.

Employee Buy-In

When it comes to preventing loss, it is important to make sure that employees are completely on board. Therefore, staff buy-in is a critical part of reducing internal company theft.

It is important that a business owner be open with his or her team about the impact of loss on the company. They should understand that profit loss can affect their paychecks or even jobs. By showing employees what is at risk, they may feel more encouraged to be involved in risk prevention.

A business owner should establish clear goals and rewards to keep employees motivated. Perhaps one can use a monthly bonus as an incentive for employees to meet loss prevention goals. It may also be helpful to hire employees specifically meant to monitor loss and identify suspicious behavior. In any case, it is a good idea to train normal employees in loss prevention so that they know what to do if they witness internal or external theft.

Have a quick question? We answered nearly 2000 FAQs.

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