A lot of inventory shrinkage comes from poor tracking processes. 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. 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.
For e-commerce and point of sale (POS) settings, secure payment processing and order verification processes also contribute to preventing inventory loss. Conducting stocktakes and comparing the results to your inventory records is the most reliable method of discovering inventory loss as this provides concrete evidence of discrepancies. Here are answers to some of the most common questions about inventory shrinkage.
How to Calculate Inventory Shrinkage
Explore some software options to determine which best suit your business and then try a few of them out. Once you’ve settled on a new platform, run a pilot program to see how your inventory shrinkage rate changes over time. It is vital to understand the major causes of inventory shrinkage to reduce the inventory shrinkage rate. It is also vital to curate measures to rectify the causes of shrinkage. The average inventory shrinkage rate differs depending on the industry of the business.
However, a small coffee shop, for instance, would face more challenges recovering from shrinkage than a larger restaurant chain. Some businesses opt to raise product prices to compensate 25 disruptive brands that changed the world you live in for profit lost to shrinkage, effectively passing on these costs through the supply chain. However, this strategy carries risks, as it may drive customers to seek alternatives.
- Inventory shrinkage can have a significant impact on a business’s financial health.
- Assume that a retailer’s computerized inventory records indicates that 961 units of Product X are on hand.
- These damages could be during transportation, while in the storage unit, or at the store.
- If you set the right par levels, you won’t have sitting inventory marching toward its expiry date.
You’re certain you didn’t sell all of it, but when you check your inventory, it isn’t there. Because you previously recorded a higher value for inventory, you must decrease your Inventory account. And, increase your Shrinkage Expense account to reflect your increased expenses. To reduce damages, come up with new processes employees can use when handling inventory. If you can justify (would you be paying them more than the shrinkage they’d prevent?) and afford the payroll for an employee who is specifically concerned with stopping shrinkage, then great.
Train employees
Reordering inventory to compensate for losses, coupled with missed sales opportunities due to insufficient stock, further erodes the bottom line. Therefore, the business has $500 worth of inventory shrinkage, which represents the hats that cannot be sold to customers. The shrinkage factor isn’t the only reason it’s a good idea to shorten the time it takes to log your shipments into stock.
The Dos and Don’ts of Retail Employee Training
Because POS systems are so integrated into the sales of a bar or restaurant, employees have the ability to use them subtly and to their own benefit. That means ringing in obsolete prices, applying discounts, or otherwise being creative with how things are rung in. They don’t often know their shrinkage numbers—which is something wholesale inventory management software and inventory forecasting helps with—but they know they’re losing product. To help prevent shrinkage, businesses can conduct inventory audits, install surveillance cameras, thoroughly review vendors, and set up theft prevention training for employees.
Shoplifting Prevention Tips
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.
Mike Mortson Global Thought Leader in Supply Chain, Change Management, Procurement, Management, and EdTech
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. It is also possible that shrinkage can be caused by supplier fraud, where a supplier bills a company for a certain quantity of goods shipped, but does not actually ship all of the goods. The recipient therefore records the invoice for the full cost of the goods, but records fewer units in stock; the difference is shrinkage. If you have errors in your accounting records, inventory costing methods, payments, or invoices it will snowball into inaccurate shrinkage rates.
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. Automating the inventory management process can help prevent errors and omissions caused by humans. 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).