What Is Inventory Shrinkage? Top 7 Ways To Prevent It

Inventory Shrinkage: Definition, Causes & How to Prevent It

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. For example, convenience store inventories are checked and monitored by the vendor.

Then they let the software analyze it all to identify events that don’t fall into the normal pattern of transactions. That means they spend more time mitigating losses and eliminating the causes of retail shrink that fall within their control.

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Right there, that’s 12 bottles of wine that won’t be accounted for. The POS will eighty-six that wine at 60 bottles and those 12 won’t be sold. With the use of software systems like Cin7, inventory shrinkage is readily caught and resolved efficiently. Having a second person verify records prevents inaccuracies and omissions. It can identify loopholes contributing to stock shrinkage so that measures can be implemented to control fraud. A checks and balances system is a system that can be implemented at crucial inventory management stages like signing invoices, accepting stock, and recording stock. Deduct the value of actual inventory from the recorded value to determine inventory loss .

Inventory Shrinkage: Definition, Causes & How to Prevent It

If your customers are price sensitive, shrinkage can also damage your customer relationships and sales. Employees are expected to be the people resisting the shrinkage but some employees think otherwise and steal from the employer. The reasons for stealing varies from being greedy to taking revenge on trying to get compensated for being underpaid/underappreciated. This is difficult to track as being the insider they are aware of the loopholes in the system. They can cover up it easily and pass this off as an accident.

Example Of Inventory Shrinkage

Get accurate counts on the busiest days and compare it to the sales reports. You’ll know exactly how your inventory’s provenance was influenced by sales and promotions. Conducting frequent cycle counts is an effective way to reveal and address inventory discrepancies. To target shrinkage and employee theft specifically, assign cycle counts and data entry tasks at random. Besides helping to reduce favoritism and bias, double-blind counting can limit opportunities for gaming the system and exploiting the inventory count process to their advantage. BlueCart is a comprehensive eCommerce software solution for wholesalers, small businesses, dropshippers, and hospitality establishments.

It also keeps track of the product movement and tracks the location of the product to the bin or shelf number. If you have not been double-checking on damaged inventory, start doing that from now on. If follow-ups are needed with vendors, implement that as well.

Types Of Internal Controls In A Grocery Store

You can even create a one-of-a-kind theft prevention training course for new and existing employees to gain more knowledge on how to spot and deter thieves. You can also use an employee management app to train new and existing employees on how they can prevent customer theft. A quick and inexpensive step any small business can take is locking doors and closing off access to inventory. Only warehouse staff should be permitted inside the warehouse.

  • It is that time when you realize that you have incurred a loss, and your valuables are gone.
  • Here are ways to prevent inventory shrinkage in your own warehouse.
  • Have certain employees who accept incoming shipments and verify outgoing shipments.
  • The value of every item is listed on the warranty or paperwork that comes with the purchase.
  • The cost of inventory may increase, and your revenue also gets affected.

Employees may take some of the business stock to compensate for an amount they feel they are being underpaid, underappreciated, or undervalued. By being insiders of the company, they may quickly cover up the theft of inventory. Businesses should treat inventory shrinkage as an expense and record it in the accounts.

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Maybe someone is taking cash from a drawer or a bottle of liquor from behind the bar. Alternatively, you can install a custom system according to your needs and budget to reduce theft as well as unauthorized access to your warehouse. For example, Rio Shoes, Ltd., had 4820 pairs of shoes, but, upon a physical count, the inventory was only 3980. Assets, you might consider storing them in an area with extra security. Some companies lock high-value items behind closed doors, while others move the highest value items offsite altogether. Then run the report to check any discrepancy between the original order and the physical count.

Vendors are an extension of your retail business, especially if they are delivering orders to your store. How well do you really know your vendors and their employees? Be sure to run a check on their reputation or any existing fines or lawsuits. You could also look at their social media, check for corporate record verification, and see if employees have any criminal convictions. But as you can imagine, that kind of enforcement doesn’t create the best morale or work environment. Failing to properly prepare for internal theft leaves you vulnerable, however.

Set up your system to provide different levels based on the trust you’ve developed. Security guards and anti-theft tags remain the most common countermeasures against these bandits, although their actual effectiveness has decreased. As a retail manager, finding viable alternatives should be one of your topmost priorities; especially considering what’s at stake. Keeping an eye of all parts of your business is no easy feat! Whether you’re managing a small brick and mortar store or a larger chain of boutiques, this job can be extremely demanding. Everything from product placement to shifts needs to planned and executed to perfection, often at the expense of your own sanity. You might not be able to identify the cause if you don’t have checks and balances of your IT systems in place.

Reliable Employees Must Be Appointed

The employee that carries out this check must be someone not involved with shipping; otherwise, you may find a conflict of interests occurring. Keep records of all inspection reports and be on the lookout for odd trends or patterns before digging deeper. Research has shown that shoplifting accounts for as much as38%of all inventory shrinkage. Shoplifting will not be a problem Inventory Shrinkage: Definition, Causes & How to Prevent It if you run an e-commerce store only. But for those with physical stores, this can account for huge losses. 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.

Inventory Shrinkage: Definition, Causes & How to Prevent It

Barcodes and QR codes are all you need to track inventory quickly, RFID technology can help reduce the risk of shoplifting. That’s because RFID tags allow businesses to keep an eye on inventory as it moves around the store—and can even trigger an alarm when exiting the premises.

Audit Hiring And Training Practices

It’s important to check your goods and your accounting records regularly to minimize such losses. In accounting, inventory shrinkage occurs when a business has fewer products in stock than are listed on the inventory record.

  • As a retail manager, finding viable alternatives should be one of your topmost priorities; especially considering what’s at stake.
  • They’re also a great way to manage employees in the retail industry because retail employees are rarely behind a desk and constantly on the go.
  • Main reasons for inventory shrinkage according to the annual National Retail Security 2017 Survey by National Retail Federation.
  • A par level is the amount of inventory you need to have available between receiving shipments to make sure you’re meeting customer demand.
  • Or warehouse shrinkage can occur when inventory is logged in at the receiving dock but isn’t found on the shelves.

By involving multiple employees, you can decrease the chances of one employee recording fraudulent numbers. And, ask employees to report suspicious behavior to discourage employee theft. Inventory shrinkage is when your business has less inventory (e.g., goods) than what you recorded in your books. Although some inventory loss is generally a normal part of running a retail business, high inventory shrinkage can indicate underlying problems. According to the 2016 survey, shoplifting and employee theft were the largest causes of inventory loss.

This includes broken packaging, cracks, tears, water damage, product expiration, and more. Alix Fraser is a Product Content Specialist at Lightspeed. Alix delights in finding ways to deliver actionable insights to retailers and restaurateurs. When not https://accountingcoaching.online/ cooking up data-driven blogs with valuable tricks and tips, Alix is on the hunt for new ways Lightspeed can help entrepreneurs bring their cities to life. Examine your employees’ shifts and ensure at least two employees are working at all times.

The amount of inventory shrinkage is therefore $50,000 ($1,000,000 book cost – $950,000 actual cost). Brigitte is a retail specialist and staff writer with brick-and-mortar management experience. Before joining FSB, she managed a storefront for several years, working in everything from merchandising, to buying, to sales analysis. Brigitte also has a background in writing, research, and publishing with an undergraduate degree in writing.

All merchandise is checked in, monitored, and stocked by the supplier. Supplier fraud occurs when the person stocking does not provide as many items as the retailer was invoiced or steals other products. Because theft accounts for the most significant amount of your loss, it’s wise totrain your employees to recognize shoplifting techniques, providing examples where possible.

Even though promotions benefit your retail businesses in many ways, they are also a potential breach that scammers can take advantage of. Nowadays, with increasing promotion offers, many scammers circulate fake manufacturer coupons online to obtain free merchandise. To deal with this, business owners and operators need to ensure that their employees are up-to-date with the current online promotions your store is running. It’s also necessary to conduct training on how to detect promotional coupon frauds for all of your employees. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage.

SourceThe future of RFID tags is becoming more prevalent in the retail industry. It has the potential to track items throughout the supply chain until final sale.

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