What Is Inventory Shrinkage? Causes, Examples, and Prevention

what is shrinkage in inventory

The software will hold all parties involved in the inventory management process accountable. It will track the location of the inventory from the point of origin to the point of sale, count the number of keystrokes, and produce logs for all the users who logged into the system. If a prospective employee demonstrates a long history of improper conduct, the company should probably not hire them.

Increase (or debit) your inventory shrinkage expense account, and decrease (or credit) your inventory account by the value of your losses. In accounting, you’ll want to record retail shrink in your inventory to reflect the fact that there was a loss in value. Conversely, debit your shrinkage expenses account to indicate the increase in expenditures for your business. The good news is by monitoring this percentage over time, you can pinpoint the causes of inventory shrinkage. For example, if your shrink rate spikes sharply over a short period, you can likely attribute this to a clerical error.

  1. If you find less on your shelves than your eCommerce accounting reflects you’ve sold, you’ve got shrinkage.
  2. If you believe that theft is an issue at your warehouse, a few security measures may be all that is necessary to slash your inventory shrinkage rate.
  3. We talked to everyone we know that runs a business and is concerned with how to stop shrinkage.
  4. Therefore, it’s worth revisiting your stock check/receiving processes, employee screening procedures, and overall security measures.
  5. Each time you take inventory is a chance to detect an inventory discrepancy.

Both you and your vendors can the risk of human entry error by using online B2B platforms like NuORDER. A lot of inventory shrinkage comes from poor tracking processes. Running a business is hard enough, but it’s even harder when your inventory is disappearing into the ether. When the Widget Fairies carry off your widgets in the middle of the night, that’s called inventory shrinkage, and it can cost your company a lot of money. Enhanced security measuresSome simple, inexpensive ways to deter theft include strategically displaying high-dollar items behind locked cases or in the back of your retail shop.

That means employees are stealing products, or customers are shoplifting, or burglars are finding a way in. According to one study, theft is by far the most common cause of inventory shrinkage, with employee theft and shoplifting making up 78.3% of inventory shrinkage cases. Automating the inventory management process can help prevent errors and omissions caused by humans.

Why Is Understanding Shrinkage Important?

That’s three times the industry median shrinkage rate of 1%. So, with money on the line, it’s obviously in your company’s best interest to identify and prevent shrinkage. In addition, shrinkage can increase a company’s costs in other areas. These costs work to further reduce profits, or to increase prices if the expenses are passed fixed asset turnover ratio formula calculator on to the customer. If you believe that theft is an issue at your warehouse, a few security measures may be all that is necessary to slash your inventory shrinkage rate. New fencing to prevent intruders, better locks, security cameras, and other methods will make it more difficult for scofflaws to make off with your goods.

Take your learning and productivity to the next level with our Premium Templates. If employees know they can come to you about working conditions, they’re more likely to speak up about what they need instead of taking it from you. According to the National Retail Federation’s 2022 Retail Security Survey, shoplifting (of all kinds) is the biggest source of shrink. The best way to combat shrinkage is to know where yours is coming from.

Use an all-in-one system for less admin errors

According to a Sensormatic study, shrinkage rates fluctuate widely from industry to industry. Stores in the consumer staple sector encounter a higher degree of wastage or spoilage, as perishable goods expire. Stores in the consumer discretionary sector experience increased instances of internal and external theft. 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 occurs when the number of products in stock are fewer than those recorded on the inventory list.

what is shrinkage in inventory

When you correct those records, you might end up with shrinkage. A powerful inventory management software platform with the latest features and tools will help you get more organized and less likely to lose track of inventory. Additionally, this software will track data and metrics -- such as carrying costs and cycle time -- to help you identify opportunities to improve https://www.quick-bookkeeping.net/facts-about-the-individual-identification-number/ inventory management. On the shoplifting side, install security cameras in the store or train your staff to spot suspicious behavior to reduce shoplifting. Change stocking procedures by putting higher-priced or frequently stolen goods behind the counter. Divide your inventory shrinkage value by the total value of your recorded inventory, then multiply by 100.

Shrinkage can have a significant impact on a company's bottom line, as it reduces profits and can lead to cash flow problems. While some degree of shrinkage is inevitable, businesses that effectively manage shrinkage can improve their financial performance and remain competitive. Leading causes of inventory shrinkage include administrative errors/miscounts, damaged or lost items, vendor fraud, shoplifting, and employee theft. Inventory shrinkage occurs when actual inventory levels are lower than your accounting records.

Overview: What is inventory shrinkage?

Cycle counting is more of a warning system than an inventory shrinkage deterrent in and of itself, however. It helps you pinpoint where shrinkage may be happening and if you need to invest more in your loss prevention strategies. Good stock management practices will help you keep on top of inventory shrinkage, though, so implement frequent cycle counting practices instead. As such, an acceptable inventory shrinkage rate is as small as possible.

How Much Is Lost to Shrinkage Annually?

Inventory shrinkage refers to the loss of products or goods between the point of manufacture or purchase and the point of sale. It is often expressed as a percentage and represents the difference between the recorded inventory and the actual inventory in a retail or warehouse setting. Inventory shrinkage is when you have less inventory than you should. Something is causing items to go missing before the point of sale. It affects every stage of the supply chain from the point of manufacture. And it affects every business's inventory turnover ratio, which can be calculated using the inventory turnover formula, and sell through rate.

Maybe someone is taking cash from a drawer or a bottle of liquor from behind the bar. We talked to everyone we know that runs a business and is concerned with how to stop shrinkage. Here are the 5 most common themes we got when it comes to controlling shrinkage. Remember, shrinkage is not a good form of inventory reduction. Most often vendor fraud takes advantage of the sheer numbers of commercial ordering and skims a little off the top by shorting the quantity delivered. Vendors can also deliver different products than were originally agreed on.

In most cases, the employer may not notice when one product disappears from a huge stock of over a thousand items. Instead, the employer/accountant will assume that the product went missing due to clerical errors during packaging or when loading goods onto a truck. 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. In the world of inventory shrinkage there are acceptable levels and unacceptable levels.

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