Inventory Shrinkage in Retail: 4 Tips to Prevent It
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. Deliveries should be counted every time they enter or leave the business premises and recorded appropriately. When a business discovers a shrinkage in its inventory, any discrepancies should be accounted for to reconcile the records with the physical inventory count. The matching principle requires that inventory shrinkage should be recorded as an expense in the financial period in which it occurred to match it against the revenues for that year. A shrinkage expense account will be recorded under the Cost of Goods Sold (COGS) account.
What is shrinkage and how do you reduce it?
Shrinkage is the loss of inventory or cash from a business due to factors such as theft, damage, or administrative errors. Shrinkage can have a significant impact on a company's bottom line, as it reduces profits and can lead to cash flow problems.
Even as stores increase security through the use of CCTV cameras, digital tags, and other means, some customers still manage to steal inventory. Divide the difference by the amount of stock recorded in the accounting books to get the percentage of inventory shrinkage. Some businesses factor in inventory shrinkage by adjusting their prices to cover the losses but this can be detrimental if it makes your products less attractive than those of your competitor.
Increased Costs
The OmniFlow suite of tools provides visibility from fulfillment through delivery with platform-level transparency so brands can stay ahead of low inventory. The platform’s real-time insights and predictive analytics allow brands to forecast inventory needs and never be caught with out-of-stock products. Ensuring optimal inventory levels can improve customer satisfaction and build customer retention. Inventory shrinkage is calculated by first subtracting actual inventory from recorded inventory and then dividing it by recorded inventory. You can convert that into a percentage by multiplying the result by 100.
It can also analyze which products are selling and the ones that are not. Also, placement of product within your store, such as keeping expensive items locked in a case or toward the back of the store, prevents the quick grab-and-run. These easy and cost-effective steps can avoid the installation of a large scale security system or hiring a team of security guards. To expedite inventory management and focus your attention on higher-level concerns, consider automating your inventory management process. 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.
Importance of inventory shrinkage in business
Fence in warehouses and administer strict security protocol to control access. If the stock is very high value, consider having a night-time security patrol. Warehouses are huge targets for thieves, as they know there will be a large number of goods in one place.
- These easy and cost-effective steps can avoid the installation of a large scale security system or hiring a team of security guards.
- If a brand’s inventory reports don’t match sales records, someone needs to spend time reconciling accounting records.
- It’s vital to keep the SKUs consistent across sales channels, warehouses, systems and anywhere else being used.
- Employees have direct access to all a brand’s products, and poor inventory count, warehouse management and security can result in employee theft.
- You could also place high visibility ‘theft’ warning signs in places where stock is held.
A dedicated inventory management software program will help reduce manual handling of stock and cut down on inventory shrinkage. Calculating inventory shrinkage is just a matter of subtracting physically counted inventory from the amount of inventory you should have. For accounting purposes, the business must create a journal entry that records the $5,000 loss as an expense. The loss of inventory may be nigh unavoidable in an imperfect world, but that doesn’t mean you have to let it cut too deeply into your bottom line. To measure the amount of inventory shrinkage, conduct a physical count of the inventory and calculate its cost, and then subtract this cost from the cost listed in the accounting records. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage.
Management errors
Whether employees are misplacing products or mislabeling inventory, communication breakdowns often result in inventory shrinkage that can be prevented. Shrinkage is caused from the loss of inventory due to shoplifting, administrative error, employee theft, vendor What Is Inventory Shrinkage And How To Prevent It? fraud, and broken items, among other reasons. An organization should track the inventory shrinkage percentage over time to gauge whether there is an increase or a decrease in shrinkage. The inventory count should be compared to the previous inventory counts.
Very few small companies talk about shoplifting prevention or have guidelines in place to handle thieves. An open and honest discussion about shoplifting may open their eyes to the issues regarding shoplifters. You can teach them to how recognize shoplifting techniques and close the gaps in your security. If you’re https://kelleysbookkeeping.com/normal-balance-for-sales/ labeling cables, tubing or other smaller items, use a heat shrink label printer. To keep track of even smaller wires, use cable-specific heat shrink labels to help indicate the function and connectivity of all equipment. By doing spot checks, you can see where each item of stock is and pinpoint any missing goods.
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