A Financial Guide To Loss Prevention: Causes And Strategies

Your startup company has set sail, left port, and navigated to open waters. But if you're not careful, financial losses can cause your business to take on water.

Financial losses are the primary factor behind why startups sink or stay afloat. Nearly 40% of failed startups list a lack of cash and capital as the reason they folded.

Keep reading to learn what financial loss looks like and how the right loss prevention tools and strategies can help your business withstand the storms and continue safely on the journey.

What Is Financial Loss In Businesses?

Financial loss occurs when your company loses money over a specified period. It can result from internal or external factors, detailed in the sections below.

Your bottom line can suffer from issues like theft or fraud, market shifts, natural disasters, and unpreventable and unpredictable factors. But some businesses hemorrhage cash despite having fairly easy solutions at hand. Some fairly simple adjustments, like maximizing efficiency, can make the difference between floating or sinking in your startup.

Internal Causes Of Financial Loss

Internal causes of financial loss are things within your organization that cause your business to lose money. Since these are costs within your organization, they are within the realm of your control. Cutting internal sources of financial loss should be a top priority.

Operational Inefficiencies

While some redundancies can provide helpful safeguards, most companies can operate more efficiently by cutting them. Specific inefficient practices will be unique to your context, but many startups suffer from some shared sources of inefficiency.

Manual data entry is a significant source of inefficiency. It can slow your accounting workflow down to a crawl. Likewise, delays in sending out invoices can defer payment and hurt the income statement. A staggering 51% of workers reported spending more than two hours daily on repetitive tasks, meaning more than half the workforce deals with inefficiency.

Fraud And Embezzlement

Fraud and embezzlement can significantly drain your company's resources, even if you detect the theft early. Losing income to fraud often means the money is gone for good. A recent study found that 52% of small businesses do not recover money lost due to fraud.

Employee theft costs companies a frustrating $50 billion. Although it may seem that larger companies make a more frequent target for fraudsters, smaller companies are not immune to fraud and embezzlement. The effects can be devastating, with the average dishonest retail employee incident costing the employer $1551.66.

Employee theft was an issue for 22% of small businesses. Simply put, whether or not your company is big enough to have loss prevention teams, it is big enough to have losses. No business has the luxury of avoiding loss prevention services.

Lack Of Financial Controls

Financial controls refer to the system of policies and procedures a company employs to administer finances. Failure to provide solid financial controls can leave your organization in rough shape. To understand why, you first have to understand financial controls.

Your startup's financial controls should follow the industry-standard best practices or generally accepted accounting principles (GAAP), which help ensure transparent, accurate, and predictable accounting practices (more on this below). Should your financial controls fail to align with GAAP, the following problems can occur:

• Fraud: Without proper controls, like division of responsibility within the accounting workflow, your organization is especially susceptible to theft and embezzlement.
• Faulty Records: Adequate controls, such as regular audits and appropriate redundancies, protect your company from untrustworthy data and unreliable records.
• Flow Problems: Poor financial controls and faulty records create issues in your accounting workflow. They create delays in processing and compound your problems by slowing everything down to a more costly snail's pace.

External Causes Of Financial Loss

Not every pain point will be internal. Your startup may suffer financial losses due to a wide array of external causes, issues originating outside of your company, which you have little to no control over.

Market Volatility

Market changes can lead to a loss of profits for your startup. To be clear, your startup company may be at the mercy of multiple markets at a time. For instance, if you over-expose your company in the stock market and the market experiences a downturn, you may be in for sizable financial losses on those investments.

Your company could also suffer due to changes in your market. For instance, a company that offers a cloud-based supply chain system starts losing money when a competitor shows up with lower prices. Similarly, changes in consumer behavior can also negatively reshape your market outlook. For example, a record shop could experience analog losses as listeners stream their favorite albums digitally.

Regulatory Changes

Some startups could also experience financial losses because of changes in government regulation. A shift in public policy can force a change in how you do business. This is often industry-specific, though occasional shifts in public policy will have wide-ranging implications for your company's overall financial health.

• Industry-specific regulations: Governments issue many rules with specific industries in mind. Consider mining and manufacturing as a historical example. As governments changed regulations for these industries, requiring higher safety standards, businesses within them had to consider how to turn a profit while following these regulatory changes.
• Wide-ranging regulations: Some regulatory changes may be more broad, adjusting benefits, compensation, and tax filing. These will impact business across a broad spectrum of industries.

Natural Disasters And External Shocks

Natural disasters and external shocks can also lead to significant financial losses for your startup. A natural disaster near your company can damage your offices, jeopardize the health and well-being of your employees, and much more. You might have to put a pause on all your operations until you and the community remedy the consequences. Even a natural disaster on the other side of the world could disrupt your supply chain, leading to delays and financial losses.

Similarly, geo-political events can cause an external shock to your business. For instance, the current discord in the Red Sea threatens a shipping channel that traffics over 1 trillion dollars in merchandise annually. This could lead to increased costs for shipping and security, not to mention the dreaded delays.

Strategies For Loss Prevention

Those were the bad news. Now, we can share some good news.

There are things you can do to help your startup business avoid significant financial losses. You don't have to be a loss-prevention specialist to increase your company's loss-prevention security.

In this section, we'll share three strategies both beginners and loss-prevention experts can follow to shore up their loss-prevention measures.

Just remember to determine the specific goal of loss prevention for your organization, and these policies will help you rise to the challenge. Also, include your security officers in the conversation (if possible) to ensure you take a team-centric approach.

Implement Strong Financial Controls

"Financial controls" refers to the system of policies and procedures your startup uses to administer finances. Implementing strong financial controls is your first line of defense against financial loss.

As mentioned above, your startup's financial controls should follow generally accepted accounting principles (GAAP). These ten principles standardize accounting's best practices with the goal of regularity, transparency, and continuity.

GAAP-aligned systems use financial controls to divide responsibilities, ensure accurate record-keeping, and execute routine internal audits. Each of these practices can prevent one or more types of financial loss by:

• Preventing fraud
• Decreasing administrative errors
• Catching operational errors before they spiral into bigger problems

Enhance Operational Efficiency

An inefficient set of operations can drive profit loss in several ways. For instance, manual human data entry is still a significant source of inefficiency in many accounting practices, both because it's time-consuming and subject to human error. Likewise, a traditional accounting workflow may have multiple departments working to process invoices. This practice can lead to slowdowns, missed deadlines, and delays.

You can boost your company's operational efficiency by streamlining your financial processes and automating your accounting process. Automation in accounting refers to the use of machine learning to perform bookkeeping tasks with a higher degree of accuracy and a lower ability to fatigue when compared to their bean-counting counterparts.

Fraud Prevention Measures

Strong financial controls can also help you avoid another critical point of focus of your loss prevention strategy: fraud. As mentioned, fraud can occur at companies of any size, but small businesses are easier prey. One study found that nearly half of fraud cases occur because of the lack of internal financial controls or overrides of internal controls.

Strengthen your company's fraud prevention controls by following these ABCs of fraud prevention:

• Ask: Start by asking yourself and your teams what fraud prevention measures your organization already has in place. Are they effective and efficient? Are they GAAP-aligned? Are there any loopholes or potential gaps you must close for fraud security?
• Build: If the answers to the above questions are not ideal, it may be time to build a better fraud prevention system. Consult industry leaders on fraud prevention to better understand best practices and how to implement them in your context.
• Check-back: Provide routine audits of your system as a way to check back in. A system that you build but not assess and maintain may not be a system that survives.

Technologies For Loss Prevention

Now for more good news: Loss prevention officers are not in this alone. In recent years, some remarkable technological advances have yielded new tools in the fight to prevent financial losses. There are two critical types of tools you can leverage to your advantage.

Financial Management Software

The most rudimentary financial management software provides basic bookkeeping services. Even at this technical level, a software program can help prevent loss by eliminating waste and human error. But this sort of data loss prevention software is just scratching the surface.

Some financial management software platforms leverage automation to radically increase their operations' efficiency, ensure data accuracy and reliability, and alert you when something needs your attention. Likewise, many of these financial management software systems can help your company plan for the future with features like market predictive analysis.

Monitoring And Reporting Tools

Your startup needs to have the best available data as quickly as possible so you can adapt to a quickly changing business landscape in real-time. Traditionally, financial reports aimed to arm startups with this critical data annually or quarterly. But this helpful practice suffers from a fatal flaw: It lags behind up-to-the-minute accuracy.

Conversely, modern monitoring and reporting tools can provide a snapshot of your company's finances at a moment's notice. Consider the potential impact of this in the retail industry.

Imagine two SAAS companies named Marty's Messages and Natalie's Notes. These competing communication platforms charge a monthly subscription fee to users and employ a free trial to increase sales. Marty uses a traditional accounting procedure, while Natalie utilizes automation in her accounting workflow. Marty will have to wait until the end of the quarter report to see how well the free trial is helping his company gain new users. On the other hand, Natalie can check in when she wants, receiving a snapshot of the company's financial records in a snap. This allows her to make adjustments to the offer based on how quickly users convert to customers.

Build Resilience Through Effective Loss Prevention

The most sea-worthy companies weather the storms by preparing before they come. The ability to mitigate financial losses before you set sail will determine how far your startup company can go.

If you want your company to survive past its maiden voyage, you must make the appropriate preparations. Implement strong financial controls, optimize the efficiency of your operations, and employ strong fraud protection to aid in loss prevention.

Remember: You don't have to set sail alone. In recent years, companies have leveraged automation to drastically improve accounting practices. Chat with a financial expert to experience the benefits of automation first-hand.

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