What Is Inventory Shrinkage And How To Prevent It?


Your inventory’s book value should be $38,000 ($50,000 – $12,000). However, due to shrinkage, your actual inventory value is $35,000. Use the inventory shrinkage rate to find out how much value you lost. Theft, both internal and external to the company, continues to be the driving force behind retail inventory shrinkage, at 78.3% of all shrinkage in 2008.If you don’t, your counts will be off, and the missing unit will falsely look like a shrinkage issue after you’ve forgotten about the damaged goods. The first-in, first-out inventory management, known as FIFO, assumes that your oldest items get sold first. This inventory management system is used widely by businesses that sell products that spoil or have expiration dates, like food, personal care, and cosmetics. Promoting FIFO in your inventory management typically looks like shelving older items in front of newer items and running promotions on old products. Because you look a bit closer when shelving, it helps catch misplaced items and keep your stock under control. This will not only help you maintain accuracy in your stock counts, but it will save you time and allow you to spot shrinkage faster and easier.

Inventory Shrinkage Is Recorded When

This rate means that you lost 7.9% of your inventory value to shrinkage. Multiply your inventory shrinkage rate by 100 to convert it into a percentage.

what is inventory shrinkage and how to prevent it?

Like those at or above 3%, which account for almost 11% of retail businesses. Adopting an inventory management system to automate and manage your inventory can reduce human mistakes. Thereby, it helps eliminate administration and paperwork errors to prevent inventory shrinkage.

Stock Control Or Clerical Errors

Your inventory shrinkage rate measures the percentage of goods lost between what you recorded and what actually sold. In 2017, the NRSS reported that external theft or customer shoplifting were responsible for 37.5% of retail shrinkage. And 33.2% of retail shrinkage was caused by employee or internal theft. That means theft accounts for roughly .98% of all retail sales and a total of almost 34 billion dollars.

what is inventory shrinkage and how to prevent it?

Shoplifting accounts for 38% of inventory shrinkage, and it surpassed employee theft as the leading cause of shrinkage in the 2016 National Retail Security Survey. Even as stores increase security through the use of CCTV cameras, digital tags, and other means, some customers still manage to steal inventory. Shrinkage is the difference between the recorded inventory and the actual inventory. 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. For example, if a retailer accepts $1 million of product, the inventory account increases by $1 million.

What Percentage Of Shrinkage Is Caused By Theft?

With a POS system, you can assign specific permissions to staff IDs that allow or disallow actions like stock adjustments, price changes, discount creating, and purchase order receipts. This way, only employees you trust can access shrink-sensitive data. Employee theft is a frustrating topic and often uncomfortable to broach.Shrinkage in retail that is caused by employee actions typically occurs at the point of sale terminal. There are different ways to manipulate a POS system, such as a cashier giving customers unauthorized discounts, creating fraudulent returns, or simply removing cash from the register. These transactions that differ from normal transactions are called POS exceptions. Traditionally, POS fraud is fought by surveillance staff monitoring a POS terminal or by manually searching in surveillance video recordings.Accurately calculating inventory KPI like average inventory, inventory days, and inventory carrying cost can all be automated. When the vineyard sells the cases of wine, the vendor or wholesaler receives and sells the wine on an online marketplace.

What is an acceptable level of inventory shrinkage?

An acceptable level of inventory shrinkage is less than 1%.Don’t hesitate to use video cameras in your store’s backroom and break, storage, and receiving areas. Employees have access to many out-of-the-way spots in your store, and that’s where theft generally occurs. Review footage regularly to ensure staff is not taking advantage of their employee privileges. Train your staff to look out for any suspicious behavior and report it without hesitation. Have them assist customers entering and exiting dressing rooms and pay attention to what merchandise goes in and comes out. During checkout, you can also train your clerks to spot-check that purchased bags are empty and that tags correctly match the items.Lock any back doors and hire a security service to guard your store if customer theft is high in your area. When your business experiences shrinkage, you must adjust your accounting books. Record inventory losses by increasing your Shrinkage Expense account and decreasing your Inventory account. If you delegate inventory management, ask two or more employees to count inventory. By involving multiple employees, you can decrease the chances of one employee recording fraudulent numbers.

Understanding Periodic Inventory Vs Perpetual Inventory

The first measurement that businesses can take is to improve the security level. Implementing a strict security protocol to control access to the warehouse will help prevent unwanted entry.Longer than that, you’re setting yourself to be on the losing end of a shrinkage problem. Every time product is acquired or sold, your inventory updates in real time.

  • Also exception reports and listings based on employees, refunds, price overrides, terminals etc. are possible to detect with modern systems.
  • 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 you’re a single brick-and-mortar store, it may be useful to install cameras and security systems in your shop or your inventory storage system.
  • You can also use staff logins to limit staff access to only the systems and areas they need to get their job done.
  • And that also means you’ll clear up more shelf space for other, more profitable products.

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. Inventory shrinkage occurs when the number of products in stock are fewer than those recorded on the inventory list. 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. 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, shrinkage works to decrease a company’s consumer base, causing them to look elsewhere for similar goods. To prevent inventory shrinkage from shoplifting, encourage employees to monitor suspicious customers.Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The company should contact the references and past employers to know the behavior and general conduct of a prospective employee. An impairment in accounting is a permanent reduction in the value of an asset to less than its carrying value.

what is inventory shrinkage and how to prevent it?

To receive inventory correctly, companies should receive and unpack all boxes in the same space, count each box, and check the items received against original purchase orders. Inventory shrinkage is the difference between a product’s recorded stock count and the amount physically on hand. The difference between these two amounts is referred to as “shrink.” In a retail setting, this is sometimes called retail shrink. Either way, it means the same thing—you’re missing inventory you thought you had. 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. According to the 2016 survey, shoplifting and employee theft were the largest causes of inventory loss.

What Is Shrinkage: How To Calculate Inventory Shrinkage

To reduce damages, come up with new processes employees can use when handling inventory. Supply Chain ManagementLearn about how supply chain management is all about getting the right products at the right time. Joe’s Accessories lost nearly $1200, only because of inventory shrinkage. 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. Brigitte also has a background in writing, research, and publishing with an undergraduate degree in writing. You will want to keep a closer eye on your more expensive inventory through more frequent cycle counts. A $300 television would be a bigger loss than a $1.99 soft drink, after all. Through the counting system that we had in place, we rarely let shrinkage issues get by us and maintained an accurate count.