CHAPTER 1

LOSS PREVENTION MEETS OPERATIONS

Becoming a Restaurateur, a Dream Come True

For some, owning and operating a restaurant is a life-long goal andthe culmination of a long career in the restaurant industry. For others,the professional satisfaction comes from opening another corporaterun restaurant. Either situation has its rewards and challenges. Butthe high failure rate can turn a dream into a nightmare and has adevastating effect on many.

Each restaurant failure has an effect on the economy. The successof a restaurant has a direct impact on the livelihoods of its honestemployees. There are many reasons to strive to make a restaurantprofitable, the livelihood of its employees notwithstanding. Perhapsthis is why some honest employees will sometimes step forwardto blow the whistle on those who they feel are jeopardizing theirlivelihood. When an employee has the courage to do this, stop andlisten ... with an open mind!

The restaurant workplace is commonly described as a "family"atmosphere. This is true even in the corporate owned, multi-store,franchisee restaurant environment. Much time is spent withco-workers and the natural progression is to form a bond with thoseindividuals whom you like and have common interests. A numberof personal relationships are formed. An example of this is thesignificant number of co-worker marriages that have taken place aftermeeting in the restaurant workplace. This is a common occurrenceand speaks to the power of the relationships that can developbetween two employees in this type of setting.

The downside to this is that this type of "family" atmosphere is notconducive to apprehending the restaurant's thieving employee. Therestaurant manager, both the general manager and the assistants,may have already fallen into the trap. The personal relationships theyhave developed in the workplace may have diminished their abilityto function in the managerial position they were promoted to. Theymay not have the ability to keep an open mind. They may no longerbelieve that their newfound friends could possibly steal from them."I know them better than that." "My friends wouldn't do that to me!"Think again!

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How We Got Here

The first public dining room—later known as a restaurant—openedin Paris in 1765. Through the nineteenth century and into the earlytwentieth century, restaurants were solely independently owned andoperated. These early restaurant operations lacked organization orprofessional associations. During the early twentieth century, groupslike Howard Johnsons and White Castle began expansion operatingmulti units and looked toward franchising in an effort to expand theirbrand. Professional organizations began to form creating America'srestaurant industry. Today the industry represents billions of dollarsin sales with millions of employees.

Like with any successful business, success is achieved by managingrevenue and banking profits to your greatest potential. As therestaurant industry blossomed, so did the need to develop businesscontrols and accountability. It is hard to imagine a restaurant withouta cash register. But, prior to 1879, restaurateurs did not have suchequipment. It was common to find restaurants using a cigar box as ameans to hold the day's proceeds. Most restaurateurs did not know ifthey were operating at a profit or loss. That all changed when a newdevice named the cash register was invented.

The early cash registers were simplistic machines, limited infunctionality, nothing more than an adding machine with a cashdrawer. Even so, coming from the cigar box, cash registers foundtheir place in business and history. The evolution of the cash registerwas driven by the need to manage sales collection through a formaland reliable process.

National Cash Register Company (NCR) became the most successfulof all cash register companies and aggressively developed better andmore reliable theft-proof registers used throughout the industry.During the twentieth century NCR built better machines with bettercontrols to thwart the unwanted business partner-thief who devisedmore ways to steal from his employer.

Not only were cash registers theft deterrents, they provided a newanalytical approach which resulted in a systemized use of informationto produce profits. The cash register became a major control pointmaking restaurant commerce much easier while making it moredifficult for thieves to steal.

Cash registers remain a key business machine but have adopted manyof the technological inroads made with the advancements of thecomputer. Computer technology allowed cash register companiesto build more control features into cash registers providing betterreporting and stronger controls over theft.

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Point Of Sale (POS) Technology

The evolution of computer technology dramatically changed therestaurant industry with the introduction of the Point of Sale System(POS). Today, POS options are numerous, such as: touch screencomputers, inventory control, credit and debit card processing, andprinting of items to kitchen printers. Restaurant ownership andmanagement now are much more efficient, effective, and profitable.

The evolution of business and the desire for businesses to be moreprofitable drives the demand for better systems and controls tolimit loss due to theft and fraud. The partnership of cash registerand computer into the development of today's POS systems hasdelivered intelligent systems making the job of catching your businesspartner-thief much easier. Point of sale systems can vary considerablyin features, functions and price. The savvy restaurateur will want toassess their own business needs before making the final businessdecision of choosing a POS system.

A point of sale system can be as simple as a standalone terminal anda second POS reader connected to a phone line. These are typicallythe least expensive systems. They look very much like a cash registerwith printing capabilities.

On the other hand, a major point of sale system will include a fullyintegrated system, complete with cash registers more commonlyreferred to today as terminals or workstations that are capable ofaccepting credit and debit cards and taking financial information.These systems are linked together through a network that is used toconnect to a server which captures the information in a database.This type of point of sale system is much more efficient than thesimple standalone unit. The fully integrated POS system allows forthe system to do more than one thing at a time. As the businesstransactions are occurring in your dining room, other system taskscan be completed simultaneously in the manager's office. An exampleof this would be having the ability to run reports to review sensitivetransactions such as voids, discounts or coupons transactions,or complete back office tasks such as labor planning, productprocurement, or any other business transactions while the POS isbeing utilized in another section of the building.

The complexity of the POS system required for your operation willdepend on the type of business, layout, size of seating area, etc. Thecurrent day POS system offers many applications that are beneficialto your daily business needs. These applications include businesssoftware to manage and control labor, forecast sales, manage yourinventory and production costs, cash management controls, and tableseating management.

You might expect that I would highlight the security features andfunctions as an area that deserves much attention when choosinga POS system. A well designed system will provide many securitycontrols to assist you in limiting potential fraud in your restaurant. Animportant beginning is to secure access to all aspects of the system.Access to the system needs to be unique and limited to the sole user.This is accomplished with the assignment of security swipe cards orbiometric scanners for capturing user access and controlling privilegelevels. In other words, you want to know who, specifically, is accessingthe system, and you don't want servers or bartenders having the sameaccess as a manager.

A common error in controlling system access is through theassignment of manually input security codes. System access by theuse of manually input security codes requires the employee to key in anumber assigned to them for system access. Utilizing keyed numberswill become a weak point in a system which is easily breached by anemployee simply by watching a user key their number into the system.Once a person acquires another person's security code, they canconduct business on the system as an imposter leaving a trail to aninnocent person. If they are able to obtain the manager's login keynumber, the sky is the limit. That said, security cards or biometricsare the preferable control point.

Security controls should be managed by user need and level ofresponsibility. This will allow for various privilege levels. Eachprivilege level will allow or limit a user's access to the system. As anexample, a manager's authorization should be required to conduct anysensitive transactions such as voids, discounts, or complimentarymeals. It is important to find the rightlevel of control that allows your teamto maintain service standards withoutloss of control or ability to track andreport sensitive transactions as described above. By definition, asensitive transaction is any alteration of sales or cash tenders. Theseare the actions that dilute the cash coming through your front doorintended to make its way to your bank account, not your unwantedpartner-thief's pockets.

Most POS systems come with a wide variety of canned reports tosupport most query needs as well as search capabilities to createyour own specific reports. For specific needs, most POS vendors arecapable of writing custom reports for you or are willing to train youto do this. If this is something you are not comfortable with, all isnot lost. There is an abundance of technical experts available on acontract basis that will custom develop reporting tools for you. Theinvestment into well founded reporting tools is an investment intomaximizing your profitability.

Your POS system should be fully capable of securely controlling allaspects of the system. In addition to access control, a well-roundedsystem will allow various secured levels for controlling guest checkusage, voids, discounts, payment limitations, no sales, time andattendance, human resources files, report printing and much more.All POS systems have a limit on how long data is available. After astated period of time, data is purged from the database in an effortto maintain reasonable system performance. It is important tounderstand these limitations so you may want to archive the data toother sources for future use. There have been many times during myinvestigations that I have gone back a year looking for closed checkjournals, and five years for raw data for sensitive transactions. So, itis to your benefit to understand where all your data is captured andstored for audit purposes. This will become your best asset whenconducting fraud audits.

The POS is the gatekeeper of controls and the foundationof information. But it is not the end of your troubles. Fraudprevention requires daily management. Don't fall into a false senseof security thinking you are safe from fraud because you investedinto the Cadillac of POS systems. You can capture and retain allpossible information but unless you conduct regular audits on thisinformation and act on perceived fraudulent transactions, you willcontinue to lose your profits to your silent partner, your businesspartner-thief who is working behind the scenes. You cannot rely ontechnology alone.

CHAPTER 2

OVERVIEW OF RESTAURANTLOSS PREVENTION

Shrinkage. You've heard the word, and unfortunately it's a wordoften used by management teams in the retail environment. Therestaurant industry is no exception. To be clear, shrinkage is lostprofits, profits that somebody else made off with—employee theft.It's money that didn't make it to the bank.According to the U.S. Department ofCommerce $50 BILLION is lost eachyear to employee theft. We're talking aboutcash flow, profits, and working capital.Capital that could have been used to buildnew restaurants, for remodeling, and for any other major expenditure.It has been estimated that restaurants are losing as much as 5% oftheir annual sales to thieving employees. We're talking amounts ofcash that would interest even Bernie Madoff.

You may remember Bernard "Bernie" Madoff. He's the infamousand greedy Wall Street money manager who "made off" with a cool$50 billion of his investors cash. He's now sitting in federal prisonserving out his 150-year sentence for stealing from those who trustedhim with their money. Madoff stole that amount over several years.Meanwhile, the U.S. Department of Commerce reports that Americancompanies lose that amount every year due to employee theft!

Every restaurant has a "mini Madoff" working his/her craft whilenobody is watching. The U.S. Chamber of Commerce estimatesthat 75% of all employees steal at least once, and that half of theseindividuals steal again. Nobody suspected Bernie Madoff until it wastoo late. He had burned a lot of really smart people, and many werehis friends.

How do we compare a thief like Bernie to the average thievingbartender, server, cashier, or manager? There are some comparisonsto be made. He fooled people and got them to let their guard down.This is what your mini Madoffs will do to you. They will convinceyou that they would be the last person you should watch as a potentialthief. You may even consider this person your friend. Don't get caughtin the trap of denial that theft could be happening in your bar orrestaurant. The U.S Chamber of Commerce tells us that three out offour employees steal at least once, and many more steal over and over

I'm sorry to state the obvious, but restaurateurs and bar owners are inthe business with the goal of making money. The best, and quickest,way to a profit in the food and beverageindustry is to bank all of the week'sproceeds. I'm talking about banking all ofthe cash that the restaurant brought in, orshould have brought in, without sharing thecash with your dishonest employees. Some wary managers andowners call the thieving employee their silent partner. That "partner,"isn't your partner at all, but is silently stealing part of your profitswithout your knowledge.

It goes without saying that the goal is to bank all of the cash, everylast penny. Sound easy? It isn't. It takes a lot of work to make sure allprofits are realized. I'm sorry to be the bearer of bad news ... but youhave at least one, probably more, mini Madoffs working behind thescenes collecting their version of a bonus while you are working longhours to pay the rent, utilities, and employee wages. You have thievesin your midst. How ironic it is that you are paying them to steal fromyou. The worst part is that they won't stop until you catch them.

Now that I have your attention, you will soon be on the right track toidentify and apprehend your unwanted silent partner. All you need todo is finish reading this book, follow the suggestions provided, andalways keep an open mind.

Your "best" employee may be your "mini Madoff." You must believethat this could be true. If you refuse to keep an open mind yourrestaurant is destined to become a feeding ground for thieves. Onethief tells another thief who is looking for a job; your manager hiresthe new thief, now you have two problems. Two squared is four,four thieves because you had one you didn't catch. Four squaredis sixteen. I think you get the picture, and the picture isn't pretty.Thieves are lazy by nature, and they hang together. If they end up inyour restaurant in multiples, the profitability of your restaurant is inserious jeopardy. Much has to happen to keep yours from becoming arestaurant failure statistic.