This is why keeping track of your inventory and having a good understanding of what’s happening in your stores is so important. Proper training on all workplace procedures will prevent shrinkage too. If employees are taught how to complete thorough inventory counts, for example, there is less room for error. Actions taken to prevent shrinkage are known as loss prevention measures. For the best protection, businesses should take on as many loss prevention measures as possible, with multiple focus points.
- 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.
- Shrinkage is caused from the loss of inventory due to shoplifting, administrative error, employee theft, vendor fraud, and broken items, among other reasons.
- If your inventory reports and sales records don’t match, you will have to spend a significant amount of time reconciling your receipts and accounting records.
- The difference between the actual inventory and the original inventory shows that there is shrinkage.
- Or you can bring in a third-party loss prevention and security expert to train employees in person.
Here are some of the ways you can prepare your business for shoplifters and deter them from taking your goods. You probably have security cameras in your store, but do you have a complete business security camera system? You also need a video analytics system that integrates with your surveillance system, POS, and more to provide insights into your business. Theft can occur between when merchandise exits the warehouse and enters the store.
It lets you track prices over time, including mark ups, mark downs, and sale prices on individual products. While retail accounting is a more attentive style of accounting, it can help identify shrinkage. In fact, over 92% of businesses reported using a code of conduct as part of their loss prevention awareness program in 2020. While this doesn’t physically prevent criminal behavior from employees, it communicates your business’s commitment to ethical conduct and sets the expectations for employee behavior. Inventory shrinkage refers to the loss of products or goods between the point of manufacture or purchase and the point of sale.
If your inventory shrinkage is rising, it might be time to implement heightened security measures. Solink’s remote video monitoring allows loss prevention managers to see what is happening in hundreds of stores everyday. Inventory management should be a priority for your business if you want to improve loss prevention. With proper inventory control, you can account for items and prevent shrinkage. Hiring and training to reduce retail shrinkage gives you a headstart in the fight against losses. For many stores, it’s easy to push crafting and enacting a loss prevention strategy off of one person’s plate … and onto no one’s.
How to calculate inventory shrinkage
While supplier fraud is not a common contributor to shrinkage, it is still a factor for retailers to consider in their loss prevention planning. Areas where this is most likely to happen are in the delivery and return processes. Whenever a SKU’s inventory levels are less than they were recorded to be for accounting purposes, there has been inventory shrinkage. Like most other business losses, inventory shrinkage impacts your bottom line.
Small businesses today can leverage tools like CCTV and digital video recorders with ease. For example, Shopify partnered with Google and Nest to help merchants use high-tech security cameras at an affordable price. Create a policy that highlights acceptable use of company property and show it to employees during onboarding. Be clear about the disciplinary actions you’ll take if someone is caught stealing from the business. 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.
Automating inventory by setting par reorder levels is the only way to bring a permanent fix to inventory shrinkage. ’ It is nothing but ensuring the right amount of stocks are readily available for sale between receiving goods from the supplier. It is important to make the right purchase decisions, driven by data always, isn’t it?
The difference between the actual inventory and the original inventory shows that there is shrinkage. Deva, who owns a retail store, wishes to calculate the shrinkage in his business. The store has a Inventory Shrinkage in Retail total inventory value of 10,00,000 Rs, and the Cost of Goods Sold for the accounting period of one year is 1,50,000 Rs. The inventory of any business consumes the major part of the working capital.
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. If the shrinkage percentage has decreased over time, it shows that the company’s inventory management techniques have reduced stock shrinkage. However, if the inventory shrinkage percentage increases over time, then the company should review the measures they have implemented to identify and correct any potential problems.
Ways to Prevent Shrinkage: Controlling Shrinkage in Retail
The fashion industry is a master at this—just think about those ink-blot tags many stores use, making it difficult to make use of stolen goods without ruining them. For bigger ticket items, you could attach item tracking tags that are deactivated by staff when customers check out. The goal is to always be on top of your inventory reconciliation to catch shrinkage as it happens. If you have inventory that’s at particular risk for theft, such as batteries or low-cost accessories, consider focusing multiple cycle counts in a row on those SKUs.
«We do think that in some jurisdictions here in the U.S., there needs to be action taken to help protect people from crime, including theft,» he said. However, he also noted that shrink «is comprised of more than one thing.» Like many retailers, Walmart Inc. is dealing with inventory «shrink,» although CEO Doug McMillon says the company’s specific challenges are different from those faced by other big retailers.
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Often that means teaching them to interact with inventory management software and that software’s recommendations and analyses. Learning how to set par levels and us the reorder point formula is how to stop shrinkage by lessening waste and spoilage. A par level is the amount of inventory you need to have available between receiving shipments to make sure you’re meeting customer demand.
While $100 may not seem like a lot in the grand scheme of things, it does represent 2% shrinkage, which is above the 1.4% average shrink found in retail sales. If it continues long-term, say every month for 12 months, it could lead to a serious loss in profits. To find out how large your inventory shrinkage is, you’ll need to calculate it. Then you’ll know how best to expense it for your business and whether you need to take steps to reduce it. We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions.
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What about store workers who may not be as invested in the organization’s performance? That’s a big chunk of sales you can hold onto just by implementing the right systems to seamlessly and accurately track inventory and sales. Shoplifting can take many forms and it can be a problem for any and every retailer. That’s why it’s vital that you take steps to mitigate the potential for shoplifting in your store. In retail, for example, 65.5% of all shrinkage in 2021 was due to theft, according to the National Retail Federation.
Before we started that practice, it was common for customers to slip skincare products into their purses or pockets when redressing after a treatment. Especially with perishable items, wastage is bound to occur. However, poor employee training and lack of adherence to company policy will increase the amount of items that need to be thrown out.
- To calculate the percentage of shrinkage, divide total shrinkage by total sales.
- Damage refers to anything that causes the inventory to become unsellable.
- Inventory shrinkage refers to the loss of products or goods between the point of manufacture or purchase and the point of sale.
- If you find less on your shelves than your eCommerce accounting reflects you’ve sold, you’ve got shrinkage.
To combat significant inventory shrinkage, you must familiarize yourself with what it is, why it happens, and the preventative actions you can take. When it does happen, you need to understand how to make correcting entries in your books for proper inventory accounting. Now that you know the recorded amount of inventory you have, it’s time to do a physical count of your inventory to see how much you actually have. In a perfect world, it would be exactly the same as the recorded inventory listed in your general ledger. The number one recommended way to prevent shrinkage, according to the US National Retail Federation, is a robust point of sale (POS) system. Epos Now Retail POS Software comes with a huge range of security features designed to keep retail shrinkage to a minimum.