Fraud is a serious threat to any business, but it can be especially devastating for small businesses. That’s why it’s important for small business owners to be aware of the early signals of fraud and to take steps to protect their businesses.

Here are some of the early signals of fraud that you can look for in your business finances:

• Sudden changes in revenue or expenses. If you see a sudden and unexplained increase or decrease in your revenue or expenses, it could be a sign of fraud. For example, if your revenue suddenly increases by a large amount, it could be because someone is falsifying sales or invoices.
• Unusual patterns of transactions. Look for transactions that are out of the ordinary for your business. For example, if you see a large number of small, frequent transactions, it could be a sign of money laundering.
• Missing or altered documents. If you can’t find important documents, or if you find that documents have been altered, it could be a sign of fraud. For example, if you can’t find the original bank statement for a large deposit, it could be because someone has forged the document.
• Employees who are living beyond their means. If you have an employee who is suddenly driving a new car or taking expensive vacations, it could be a sign that they are embezzling money from your business.
• Employees who are reluctant to take vacations or sick days. Employees who are involved in fraud may be reluctant to take time off because they don’t want to leave their schemes unattended.
• Employees who are always asking for favors. Employees who are involved in fraud may ask for favors from their colleagues, such as covering their shifts or helping them with their work.

In addition to these financial red flags, you should also be aware of the following behavioral red flags that may indicate fraud:

• An employee who is suddenly withdrawn or secretive.
• An employee who is always complaining about their job or their pay.
• An employee who is constantly late or absent from work.
• An employee who is always asking for money or favors.

If you see any of these red flags, it’s important to investigate further. You can do this by talking to the employee, reviewing their financial records, or conducting an internal audit. If you suspect fraud, you should report it to the appropriate authorities immediately.

Here are some of the numbers that you can look at to help you detect fraud in your business:

• Accounts receivable aging report. This report shows how long it takes your customers to pay their invoices. If you see that a lot of your invoices are past due, it could be a sign of fraud.
• Inventory turnover ratio. This ratio measures how quickly you sell your inventory. If your inventory turnover ratio is declining, it could be a sign that someone is stealing inventory.
• Profit margin. Your profit margin should be relatively stable over time. If you see a sudden and unexplained decline in your profit margin, it could be a sign of fraud.
• Return on assets (ROA). ROA measures how efficiently you are using your assets to generate profits. If your ROA is declining, it could be a sign of fraud.
• Fraud triangle. The fraud triangle is a model that explains the three factors that are necessary for fraud to occur: opportunity, pressure, and rationalization. By understanding the fraud triangle, you can better identify the risks of fraud in your business.

By being aware of the early signals of fraud and by monitoring your financial statements carefully, you can help to protect your business from fraud.

Here are some additional tips for preventing fraud in your small business:

• Have strong internal controls in place. This includes things like segregating duties, requiring dual signatures on checks, and conducting regular audits.
• Train your employees on fraud prevention. This will help them to identify and report suspicious activity.
• Create a culture of honesty and ethics in your business. This will make it less likely that employees will engage in fraudulent behavior.

By following these tips, you can help to protect your small business from fraud.

Saurabh Maheshwari

2023