What Is Inventory Shrinkage & How Do I Prevent It?

20 Oct What Is Inventory Shrinkage & How Do I Prevent It?

The term shrinkage may also be used by manufacturers to describe the loss of raw materials during their production processes. This shrinkage is also known as spoilage or waste and it can be either normal or abnormal. The best fulfillment services https://quick-bookkeeping.net/ companies will have low or no shrinkage allowances. So, when you outsource your fulfillment operations, you may be able to reduce your shrinkage rate. Placing your order fulfillment in the hands of professionals could actually save you money.

• Determining inventory shrinkage involves simply deducting the physically counted inventory from the expected amount.
• According to a study from the National Retail Foundation, retail businesses lost $62 billion from “shrink” in 2019, amounting to an average of 1.6% of sales.
• Unknown causes represent about six percent of the total inventory shrinkage.
• Before joining FSB, she managed a storefront for several years, working in everything from merchandising, to buying, to sales analysis.
• If you’ve ruled out theft and administrative errors, investigate whether your supplier is abiding by your contract and that your numbers match up.

Run credit, background, and criminal checks before hiring, and reach out to applicants’ references to identify any red flags. However, most of them boil down to these three main categories of shrinkage. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Large airlines can’t afford to have even one crash, yet they make thousands of flights each day.

How to Prevent Inventory Shrinkage?

Warehouse footage can do more than reveal an employee with sticky fingers. When you understand the root causes of product damage and loss, you can put systems in place to reduce inventory shrinkage. Some problems with inventory management https://business-accounting.net/ stem from lack of training. Make sure all your employees understand your processes and implement them properly. While training time may seem unproductive, it will improve your bottom line if it reduces your shrinkage rate.

• Consider a scenario where a grocery store records 50 notebooks of a particular type, worth 100$, only to discover 40 notebooks ($80 worth) during a physical count, with none sold.
• Inventory Shrinkage – It is the difference between the cost price of inventory available and of inventory bought.
• Warehouse footage can do more than reveal an employee with sticky fingers.

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.

How Do You Calculate Inventory Shrinkage?

An integrated system makes decisions about what to do about shrinkage easier, too, because you have a lot of the information you need on hand for easy reference. Unhappy and under-trained employees are risk factors for theft. Organized retail crime, where two or more people conspired to steal merchandise to resell, also falls under the shoplifting label.

The products can be pinned with tracking devices if limited in numbers. Anti-theft alarms can be placed at the security check along with a manual checking process. He world market losses billions of dollars in inventory shrinkage each year. Theft is the main cause of retail shrinkage, accounting for an average of 40% of a retailer’s annual shrinkage. You can use our shrinkage calculator below to determine the shrinkage your business is experiencing. And continue reading to learn how to calculate shrink by hand, review the causes and impacts of retail shrink, and explore ways that you can prevent loss in the future.

Administration Error

They follow a rigorous safety process that involves many employees checking and double-checking to make sure basic tasks are done. If one employee makes a mistake, plenty more follow up behind to catch it and make sure, for example, https://kelleysbookkeeping.com/ that a part was replaced at a certain milestone. For example, certain doors could require a keycard that only some employees have so others — such as those doing general warehouse maintenance — would not have access.

How Continuous Innovation Helps Manufacturers Make Great Products?

It is typically a matter of fixing your receiving, counting, and tracking procedures, as well as automating your processes. 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. Inventory shrinkage is recorded when you want to reconcile your sitting inventory with your inventory records.

Employee Theft Prevention Tips

Theft stands out as a primary contributor to industry wide shrinkage. For instance, in retail, theft accounted for 65.5% of total shrinkage in 2021, as reported by the National Retail Federation. Vendor fraud prevention
Frequently audit your wholesalers by reviewing your master files and comparing your suppliers’ invoices against purchase orders and goods receipts.

Determining inventory shrinkage involves simply deducting the physically counted inventory from the expected amount. This calculation parallels the assessment of financial loss, where the dollar value of the counted inventory is subtracted from the documented “book value” of the inventory. For instance, if a furniture store logs a shipment of 100 new desks valued at $25,000 but only has 90 desks worth $22,500 on hand, the ten missing desks, valued at $2500, represent the shrinkage. To account for this loss, the business must create a journal entry recording the $2500 as an expense.