A double-check system also helps to identify loopholes that may contribute to stock shrinkage and to implement measures to curb fraud. Although most businesses have moved from paperwork to digital methods of record-keeping, administrative and paperwork errors are still among the leading causes of shrinkage. Administrative errors may include pricing mistakes, accidental reorders, missing or additional zeros, or left-out decimal points. To reduce such errors, inventory should be physically counted and re-counted even when the business relies on automated systems. Clerical errors like this also lead to premature ordering and, eventually, sitting inventory that takes up shelf space.
Because of the preceding issues, a business might elect to invest in extra security for its inventory, including fencing, electronic surveillance, and security guards. If so, these are incremental costs that would not have been incurred if the firm had not suffered from persistent inventory shrinkage. According to the 2016 National Security Survey, businesses in the United States lost $45.2 billion through inventory shrinkage in 2015. The amount represented a significant increase from the $35.3 billion recorded in 2008 during the National Retail Security Survey (2008). Getting a second person to verify the records helps prevent inaccuracy and omission of key details.
Shrinkage Sources by Industry
Likewise, and it doesn’t have to be a perishable item, if any product is damaged beyond the point of reselling, it will increase your shrinkage percentage. Returns and exchanges contribute to damage-based shrinkage substantially, especially as one of the causes of retail shrinkage in traditional, non-hospitality retail environments. These increased prices are passed on to the consumer, who is required to bear the burden for theft and inefficiencies that might cause a loss of product. If a consumer is price sensitive, then shrinkage decreases a company’s consumer base, causing them to look elsewhere for similar goods. If products are going missing, inventory theft is a strong possibility.
- In addition, shrinkage can increase a company’s costs in other areas.
- Instruct employees on best practices to avoid spoilage, such as stocking new products behind those with upcoming expiration dates.
- As such, an acceptable inventory shrinkage rate is as small as possible.
- However, inventory is often lost due to any number of reasons, causing a discrepancy between the book inventory and the physical inventory.
Inventory is complicated to manage, so it’s not surprising that units get lost in the shuffle. Some adjustment for inventory shrinkage is unavoidable, particularly in larger operations. However, improving your administrative processes should help prevent some products from disappearing. The next most common reason for inventory shrinkage is administrative, at 15.4%. This includes simple errors on the part of your staff such as miscounting, paperwork mistakes, or not factoring in things like inventory turnover ratio. Simple signage lets consumers know about CCTV cameras, and employees can frequently check in with customers to deter shoplifting even further.
The discrepancy may occur due to clerical errors, goods being damaged or lost, or theft from the point of purchase from a supplier to the point of sale. The inventory KPI for inventory shrinkage is the shrinkage rate, which measures the percentage of inventory loss as a result of shrinkage. It is an important metric to monitor and minimize to ensure efficient inventory management and profitability. For example, if a retailer accepts $1 million of product, then the inventory account increases by $1 million.
Frequently Asked Questions About Inventory Shrinkage
This one is pretty self-explanatory, but if perishable products aren’t used by their expiration date, they contribute to inventory shrinkage. In our example, the wine bar isn’t able to sell the last half case of wine before the 3-year expiration date. Those 6 bottles, lost to the ravages of time, are shrinkage. Either someone external does it and it’s called shoplifting or external theft, or someone internal does it and it’s called employee theft or internal theft.
Book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer. When a retailer receives a product to sell, it records the dollar value of the inventory on its balance sheet as a current asset. This can trigger substantial additional costs to bring in replacement inventory on short notice.
A loss of inventory ultimately translates to a loss in profit, diminishing your bottom line. By calculating your shrinkage percentage rate, you can determine the reasons behind your inventory loss and take steps to address the root causes. If you have errors in your accounting records, inventory costing methods, payments, or invoices it will snowball into inaccurate shrinkage rates. No matter what industry you’re in, there are numerous software solutions for your business. Whether your products are all sold in bulk with an MOQ (what does MOQ mean?) in place or not, automation can help.
It conducts a physical inventory count, and calculates that the actual amount on hand is $950,000. The amount of inventory shrinkage is therefore $50,000 ($1,000,000 book cost – $950,000 actual cost). The inventory shrinkage percentage is 5% ($50,000 shrinkage / $1,000,000 book cost). Inventory shrinkage is the excess amount of inventory listed in the accounting records, but which no longer exists in the actual inventory. Excessive shrinkage levels can indicate problems with inventory theft, damage, miscounting, incorrect units of measure, evaporation, or similar issues.
However, if the inventory shrinkage percentage increases over time, then the company should review the measures they have implemented to identify and correct any potential problems. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage. But 11% of retail businesses report shrinkage rates at or above 3%.
Train your team on smart shelving practices and proper handling and storage to help curtail damaged goods. Employee screening and educationFrom the very beginning, close screening of potential candidates reduces potential inventory theft. Run credit, background, and criminal checks before hiring, https://www.bookkeeping-reviews.com/best-invoicing-software-of-2021/ and reach out to applicants’ references to identify any red flags. If you’re interested in learning how Lightspeed Retail POS could help you cut down on administrative errors and speed up how you work, let’s talk. When most retailers think of shrink, they think of theft, or shoplifting.
Inventory shrinkage is when you lose inventory due to factors other than sales. It can generally be defined by the difference between your inventory levels on paper and your actual inventory levels. Every retailer across every industry is impacted by shrink, with organized retail crime being one of the industry’s prime concerns how to find the best business accountant for your small business (but not, notably, the only cause of shrink). To help prevent shrinkage, businesses can conduct inventory audits, install surveillance cameras, thoroughly review vendors, and set up theft prevention training for employees. Explore some software options to determine which best suit your business and then try a few of them out.
Restrict access to certain employees
Every time you sell an item, the value of your inventory on hand is reduced by the price of that item. Conversely, whenever you place a new order of stock, the value of your inventory increases by the amount you ordered. Your shrinkage is whatever discrepancies arise between the sales and orders you have recorded and the actual value of the inventory you have on hand. Employee theft, also known as internal theft, is a significant contributor to shrinkage. The NRF’s survey found it was the source of 28.5% of inventory shrinkage, second only to shoplifting (external theft). Sometimes all of your investigative work comes up with nothing, and you just chalk it up to “unknown” — which is the case 3.9% of the time.
Installing security cameras in employee-only areas, such as stockrooms and break rooms, can also decrease internal theft. The initial action that a business should take to prevent inventory shrinkage is to implement a double-check system. It should have more than one person assigned to important inventory management stages, such as signing invoices, recording stock, and accepting stock. Although employees should be at the forefront of preventing inventory shrinkage, some dishonest employees may steal from their employers. Employees may take some of the business stock to compensate for an amount they feel they are being underpaid, underappreciated, or undervalued.
A dedicated inventory management software program will help reduce manual handling of stock and cut down on inventory shrinkage. For example, assume that company ABC owns $100,000 of inventory recorded in its accounting books for a specific accounting period. If the company conducts stock inventory and finds the stock on hand to be $95,000, the amount of stock shrinkage is $5,000 ($100,000 – $95,000).