What Is Inventory Shrinkage?

We will go into more detail below, but the best way to mitigate recording errors is to automate your inventory management with a POS system wherever possible. Avoiding stock control errors will improve your grasp of your inventory and help you avoid false shrinkage. In the world of inventory shrinkage there are acceptable levels and unacceptable levels. But it’s harder for the wholesaler to count the 598 cases of wine they got from the vineyard.

Of that portion, 42.7% is attributed to employee theft and 35.6% was due to external theft, known as shoplifting. While you most likely will face some amount of shrinkage in your retail business, you can take steps to mitigate issues like theft and clerical errors to minimize your retail shrink. Here we will look at strategies and technologies that you can use to prevent customer theft, employee theft, and reporting errors.

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It is basically reduction in the quantity of inventory that you hold because of the factors that are not in your direct control. Blog Read the latest in the inventory world in our articles. Meaghan Brophy is Fit Small Business’s authority on retail and ecommerce.

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. They don’t often know their shrinkage numbers—which is something inventory management software and inventory forecasting helps with—but they know they’re losing product. If your inventory reports and sales records don’t match, you will have to spend a significant amount of time reconciling your receipts and accounting records. If this information is full of errors, the IRS can get involved as well and potentially audit your business. For every piece of inventory that’s unaccounted for, you’re essentially throwing away money or losing product.

Inventory Shrinkage: What It Is And How To Prevent It

Mean lost profit, as you were likely forecasting more revenue than your actual inventory numbers can b0ring in. Save money without sacrificing features you need for your business. If you sell items that go bad, like food, offer discounts when they get close to their expiration dates. Some businesses do a daily or weekly count of inventory to catch fraudulent activities more quickly.

So, with money on the line, it’s obviously in your company’s best interest to identify and prevent shrinkage. If the shrinkage percentage has decreased over time, it shows that the company’s inventory management techniques have reduced stock shrinkage. 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. An organization should track the inventory shrinkage percentage over time to gauge whether there is an increase or a decrease in shrinkage. The inventory count should be compared to the previous inventory counts. Automating the inventory management process can help prevent errors and omissions caused by humans.

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A simple human error one day shows up as a shrinkage down the line when a physical count is conducted. These are the types of errors that can occur at any business, including your suppliers’. A simple checks and balance system can prevent the misplacing of a digit. For one, scanning barcodes is a more reliable method for entering product information than keying it in manually. Manual stock taking with manual systems is notoriously unreliable. It is easy to transpose digits and record an incorrect number of products.

Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes. Damage refers to anything that causes the inventory to become unsellable. This includes broken packaging, cracks, tears, water damage, product expiration, and more. Shrinkage results in a loss of profits due to inventory bought but not able to be sold.

Understanding Shrinkage

Industry TermsLearn about all the important retail industry-related terms in this section. Order ManagementThe entire life-cycle of order from a fulfillment center to reaching the customer. Often, a Purchase Manager may inflate the demand, making you pay more for the PO. The vendor may personally know your purchase manager and might be involved in a scam where both benefit each other. To determine a percentage, divide the amount by your inventory value.

To get an accurate count of your inventory and its shrinkage you must track your inventory levels. You can use our Inventory Management Workbook to create a system that will work for you. Plus, the guide includes an inventory shrinkage calculator to help automate this process. When staff is operating lockstep with standard operating procedures, it lowers shrinkage significantly. Train your staff on your inventory pipeline, their role in it, and how to work efficiently. Often that means teaching them to interact with inventory management software and that software’s recommendations and analyses. A better way to look at acceptable levels of retail inventory shrinkage is the median 2018 reported shrinkage.

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The POS will eighty-six that wine at 60 bottles and those 12 won’t be sold. 1.4% of the wine bar’s sales of this wine bottle are lost. It’s actually right around average and speaks to an industry-standard amount of shrinkage control. According to the 2016 survey, shoplifting and employee theft were the largest causes of inventory loss. In 2008, employee theft represented 42.7%, while shoplifting represented 35.6% of the total inventory shrinkage. Inventory shrinkage management should be a priority for your business. With proper inventory control and management, you can account for and prevent shrinkage, no matter the size of your business.

They can help you manage your inventory turnover rate and reduce your inventory carrying costs to save your business money. Most 3PLs provide transparent reporting and technology to help you control stock levels to precent inventory shrinkage. However, inventory is often lost due to any number of reasons, causing a discrepancy between the book inventory and the physical inventory. The difference between these two inventory types is shrinkage. Inventory shrinkage over the course of your business’s lifetime. It doesn’t take much shrinkage to make a noticeable impact on your business. An average shrink rate of 1.62% translates to $61.7 billion in losses across the industry.

Averting Stock Shrinkage

They take precautions to keep your inventory safe and secure while allowing merchants to outsource fulfillment, which is often costly and unproductive to manage in-house. Clearly define how you’ll pick SKUs to count each week and write out the steps for cycle counting employees. Happen, you can consult your camera footage for visual evidence. Security cameras are also effective in lowering employee theft. Cycle counting refers to the practice of counting a small amount of your inventory on an ongoing basis. You might do a weekly count of 10 different SKUs, for example, or you might pick 20 particular SKUs to count weekly for a month to monitor stock level changes for those products. However, there are things you can do to get your shrinkage rate as low as possible.

• The wholesaler stocks it, scans it, inventories it, sells it, and ships it to hundreds of individual retailers.
• We will also look into measures to prevent loss, theft, and overall inventory shrinkage costs.
• Sloppy receipts lead to inaccurate numbers, missing inventory, and payments to suppliers for stock not received.
• Also, frequent Inventory Shrinkage can lead to complications related toinventory control.
• But, at that moment, you also realize that a few of your goods are missing.

In restaurant kitchens, shrinkage refers to the difference between the amount of food you acquire from suppliers and the amount of food you sell to customers. The term shrinkage is also used by manufacturers when referring to the loss of raw materials during a production process. For example, a manufacturer of baked food items will experience shrinkage throughout its processes due to ingredients adhering to the beaters and bowls, and also due to evaporation. This shrinkage is also known as spoilage or waste and it can be either normal or abnormal. Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage. Unknown causes represent about six percent of the total inventory shrinkage. Third-party logistics or 3PLproviders are professional fulfillment companies that help ecommerce businesses store inventory in the 3PL’s fulfillment centerto pack and ship orders.

If a consumer is price-sensitive, shrinkage works to decrease a company’s consumer base, causing them to look elsewhere for similar goods. In some cases, you might have inventory shrinkage because of malicious actions, such as theft, shoplifting, or fraud. Vendors may commit fraud and give you less inventory than what you purchased. Shrinkage is also common when customers shoplift from your business. When running a business, you likely face setbacks due to unforeseen costs. Unplanned expenses, like inventory shrinkage, can lead to a drop in profits and require you to alter your accounting books. Losses that occur on paper due to error and do not involve breakage, theft or spoilage are much easier to avoid.

Supply Chain Management Learn about how supply chain management is all about getting the right products at the right time. Brigitte is a retail specialist and staff writer with brick and mortar management experience. Before joining FSB, she managed a storefront for several years, working in everything from merchandising, to buying, to sales analysis.

They have a contract with a wine wholesaler who buys every case available to distribute to retail wine shops, bars, and restaurants. But the vineyard only has 598 cases of wine to sell to the wholesaler. The process of bottling, labeling, packing, storing, and shipping the wine cause 2 cases—24 bottles—to disappear.

• Retailers are proactively taking steps to find better candidates and identify red flags during the hiring phase.
• Conversely, whenever you place a new order of stock, the value of your inventory increases by the amount you ordered.
• Having a two-person system for stock check and receiving creates more accountability and makes it harder for dishonest employees to steal.
• Inventory shrinkage is when your business has less inventory (e.g., goods) than what you recorded in your books.
• If you can’t place your checkout counter at the entry, just make sure that there is a clear line of sight from your cash wrap to the exit.