Inventory shrinkage is when actual inventory levels are less than accounting has them recorded as. Usually this means something has gone wrong, either from an accounting error or theft. 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. To understand the cost of shrinkage to your business, you need to understand how to calculate shrinkage. Understanding your shrinkage percentage will help you with inventory management.
For restaurants or other food industry businesses, this includes issues like spoilage. External theft, like shoplifting, is one of the largest causes of shrinkage reported by retailers, accounting for 37% of all shrinkage. If your actual inventory is smaller than your recorded inventory, you have shrinkage. Inventory shrinkage, the unexpected loss of inventory, is a big problem in retail. It accounted for roughly $100 billion in losses in 2022—up from about $90 billion in 2020. When staff is operating lockstep with standard operating procedures, it lowers shrinkage significantly.
- Inventory is complicated to manage, so it’s not surprising that units get lost in the shuffle.
- If a prospective employee demonstrates a long history of improper conduct, the company should probably not hire them.
- 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.
- The good news is by monitoring this percentage over time, you can pinpoint the causes of inventory shrinkage.
- Your company can proactively reduce missing inventory by installing security cameras in critical areas to double checking during inventory counts.
That’s because when inventory is lost, stolen, or damaged, your business’s productivity and profitability can really suffer. By maintaining the records over time, the process can help in drawing a comparison of losses that occurred over time and differences after each check. In the long run, it will help in bringing the inventory shrinkage down. Security checks should be a non-negotiable concept when it comes to inventory. The warehouse or the retail outlet should be covered with a web of CCTV cameras.
Ways to Reduce Inventory Shrinkage
At the end of the day, when you sit to tally your accounting records and realize a few values are not adding up, it is a frustrating feeling! But, at that moment, you also realize that a few of your goods are missing. If accounting books are not matched, it causes audit and taxation problems. However, due to shrinkage, your actual inventory value is $63,000.
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- As a high-end brand committed to using only the highest-quality ingredients, they couldn’t afford to sustain the average of 1 to 4 cans of damaged product per shipment they were seeing.
- Inventory shrinkage is recorded when you want to reconcile your sitting inventory with your inventory records.
- Brands can also educate employees on the impact of inventory shrinkage because they might not fully understand how small theft impacts the bottom line and, ultimately, their jobs.
It’s important to understand your shrinkage rate because it affects your bottom line. Here’s everything you need to know to calculate and prevent inventory shrinkage. There can be a few more reasons accountable for inventory shrinkage. But the ones mentioned above are the most prominent ones to be reported. However, the scope of reducing the temperament of carelessness can turn the wheel around to reduce Inventory shrinkage. There are a lot of ways in which a business can save the cost of inventory shrinkage.
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. Shrinkage as a KPI six strategies for fraud prevention in your business measures the rate at which actual inventory value has decreased over time. After identifying the main causes of inventory losses, you can utilize shrinkage rate to see how successful your prevention methods are. According to the 2022 National Retail Security Survey, the average shrink rate for retailers across industries in 2021 was 1.4%.
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. If this information is full of errors, the IRS can get involved as well and potentially audit your business. Management errors such as miscounting, wrong units of measurement used, or any other type of human error that was a mistake can lead to inventory shrinkage. This is even possible when automation is used for inventory management.
reasons your business can experience inventory shrinkage
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. With the inventory shrinkage rate increasing, the company can encounter a big hit on their profits. The cost of inventory may increase, and your revenue also gets affected.
Likewise, and it doesn’t have to be a perishable item, if any product is damaged beyond the point of reselling, it will increase your shrinkage percentage. Returns and exchanges contribute to damage-based shrinkage substantially, especially as one of the causes of retail shrinkage in traditional, non-hospitality retail environments. In businesses with complex supply chains, the inventory may at one point be handled by third parties who are not part of the company. The theft may occur during transit from the supplier’s warehouse to the business premises or when loading and unloading the products.
With these two values in hand, you’re ready to calculate your inventory shrinkage, which is your recorded inventory minus your actual inventory. Each time you take inventory is a chance to detect an inventory discrepancy. How to prevent shrinkage is an exercise in how often you’re taking inventory. Longer than that, you’re setting yourself to be on the losing end of a shrinkage problem. Every time product is acquired or sold, your inventory updates in real time. Either someone external does it and it’s called shoplifting or external theft, or someone internal does it and it’s called employee theft or internal theft.
Thankfully automation has gotten us pretty far in dealing with both of these problems and we’ll touch on that in a bit. Accurately calculating inventory KPI like average inventory, inventory days, and inventory carrying cost can all be automated. If the wine-bar in our example input 10 bottles of wine per case instead of 12, they would have recorded 60 bottles in their inventory instead of 72. Right there, that’s 12 bottles of wine that won’t be accounted for.
In restaurant kitchens, shrinkage refers to the difference between the amount of food you acquire from wholesale food distributors and the amount of food you sell to customers. If a prospective employee demonstrates a long history of improper conduct, the company should probably not hire them. Hired employees should undergo rigorous training on how to handle inventory appropriately and carry out stock-taking.
The process of bottling, labeling, packing, storing, and shipping the wine cause 2 cases—24 bottles—to disappear. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. 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.
To reduce damages, come up with new processes employees can use when handling inventory. Having high levels of inventory shrinkage can be devastating to your company’s bottom line. You can avoid or lessen inventory shrinkage by taking action. Once you know the amount of inventory you should have, determine how much inventory you actually have.
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. 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. Products sitting on the loading dock aren’t available for sale, so they aren’t making you money. You could even end up with backorders of goods that you have in stock because of receiving delays.
But when your team actually counts inventory in the warehouse, they can only locate 73 sets. Or warehouse shrinkage can occur when inventory is logged in at the receiving dock but isn’t found on the shelves. Often, product shrinkage comes to light when you are physically counting stock. Accounts Affected by Inventory Shrinkage – Inventory shrinkage precisely affects 2 accounts.
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