What is Shrinkage and How Do You Avoid It?

You ran the numbers but the books aren't adding up. Something is a-miss as profit margins miss their mark. You suspect trouble.

Is the problem shrinkage?

Shrinkage is inventory loss -- missing products as if they disappeared into the void. Almost all businesses experience shrinkage. It's only a problem when the numbers are higher than expected.

Retail Shrink: How Much is Too Much?

Anything above the 1.44% shrinkage average is a call for concern. This higher-than-average loss has a direct impact on profits. Even 0.01% extra inventory shrinkage costs thousands a day to large businesses.

Run the numbers (analytics) before you point fingers with this process:

  1. Calculate the inventory's book value of what's in stock
  2. Subtract the value of the inventory to discover the total loss
  3. Divide the loss value by total sales for the shrink percentage

Or, use accounting services reporting discrepancies to you or loss prevention.

Repeat this process quarterly or year-over-year to create a baseline. If this baseline deviates from the norm then you know you have a problem.

How to Prevent Shrinkage at Your Business

There are several major contributors to retail shrinkage:

Customers can walk out with items. Employees can miscount or misplace inventory. These are examples of expected retail shrink.

Here are ways to prevent shrinkage from intentional actions:

Theft

Retailers lost an estimated $48 billion from shrink as of 2016:

  • 38% from shoplifting
  • 34.5% from employee theft

Inventory placement can reduce theft by way of encasing valuable items. Or, placing items in clear view of security systems and employees. Curb shrink on the backend by limiting store access only to those deemed necessary.

Other ways to reduce theft include:

  • Introduce inventory tracking
  • Create policies and address issues
  • Use open layouts and proper lighting
  • Apply RFID tags to high-end items
  • Do regular drawer count and drops

Or, hire security personnel to patrol the workspace monitoring activity.

Errors

Administrative errors like miscounting or pricing errors are common. Ways to reduce errors include using accounting systems and counting policies.

  • Conduct regular inventory counts
  • Educate employees about their tools and resources
  • Have a two-part system to recheck data

Cycle counting is a daily inventory count used by many businesses. The counting keeps a running tab for accounting. This also decreases errors from large counts held at quarters or end-of-year.

Fraud

Vendor fraud is rampant using procedures like:

  • Overbilling item counts
  • Routing payments to shell companies or individuals
  • Forging fake invoices and checks
  • Fixing prices determined by coordinating competitors

Vendor and employee due diligence are the first actions to prevent shrink from fraud. Background checks are another verification method.

Damage

Malicious customers and employees destroying inventory or damaging systems define shrinkage. Security systems and oversight -- like with theft -- are two avenues reducing this loss.

Consider these, too:

  • Sturdier racks and shelving stopping collapse
  • Backup power during electrical outages saving cold goods
  • Protective barriers limiting damage from impacts

Preventing a Total Loss with Smart Accounting

Repeated shrinkage is a tax write-off placed in the "other" expenses when filing. But, this record can stress owners much like claiming write-offs on personal taxes. We all know how tough the IRS gets with this.

Need help navigating write-offs like inventory shrinkage? Or, need help with the small business taxes in general? Get in touch for a free consultation.