This can be done by tracking inventory more carefully, conducting regular inventory audits, and instituting policies and procedures to ensure that inventory is properly accounted for. Inventory shrinkage is also known as inventory loss, inventory variance, or shrink. It is the measure of lost or stolen inventory, which is a common problem in any business that sells products. Internal controls are typically put in place to help prevent employees and customers from stealing company inventory. The most common control that we see when we walk into department stores is magnetic detectors.

And it affects every business’s inventory turnover ratio, which can be calculated using the inventory turnover formula, and sell through rate. Because that inventory isn’t being turned over or sold. Inventory shrinkage is recorded when you want to reconcile your sitting inventory with your inventory records. If you find less on your shelves than your eCommerce accounting reflects you’ve sold, you’ve got shrinkage. Before you determine inventory shrinkage, it’s crucial married filing separate status on your 2020 or 2021 tax return for you to understand the average inventory formula. These types of anti-shoplifting devices are primarily focused on external customers.

The shrinkage percentage is 5% [ ($5,000/100,000) x 100]. If you have errors in your inventory counts when manually taking inventory, that screws up your shrinkage rate. To take any action on shrinkage, you need accurate information. A better way to look at acceptable levels of retail inventory shrinkage is the median 2018 reported shrinkage. The median is the point in which half the numbers are above it and half below.

Damage

Pouring 6 ounces of wine instead of the standard wine pour is a human error that can compound over time to increase shrinkage numbers. In the food and beverage industry, the same goes for any measuring and portioning done by people. If you’re interested in learning how Lightspeed Retail POS could help you cut down on administrative errors and speed up how you work, let’s talk.

To reduce such errors, inventory should be physically counted and re-counted even when the business relies on automated systems. For example, assume that company ABC owns $100,000 of inventory recorded in its accounting books for a specific accounting period. If the company conducts stock inventory and finds the stock on hand to be $95,000, the amount of stock shrinkage is $5,000 ($100,000 – $95,000).

If you’re on the short side of that, you’re doing well. An acceptable level of inventory shrinkage is less than 1%. Employee theft, also known as internal theft, is a significant contributor to shrinkage. The NRF’s survey found it was the source of 28.5% of inventory shrinkage, second only to shoplifting (external theft). You can also take steps to reduce the risk of certain types of shrinkage. Another way to reduce shrinkage is to improve inventory control.

This streamlines your daily admin, gives you an accurate inventory count, and saves you and your staff hours of admin time. Think of your stockroom and cash registers as restricted zones. Only give access to retail employees who really need it, like managers or trusted staff.

Shrinkage is when a store loses inventory due to internal theft, external theft (AKA shoplifting), administrative errors, vendor fraud, damage, and cashier mistakes. It’s basically the gap between what the store’s records say they have and what they actually have. This is a big issue for retail businesses because losing inventory means losing profits. If you’re using a POS system like Lightspeed, you can check your inventory levels and past cycle counts at a glance, making it simpler to monitor potential shrinkage rates. Cycle counts also take less time, because you can scan inventory levels directly into the system—which cuts down on potential administrative errors entering the counts.

Automate Inventory and Reporting

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. The restaurant POS will eighty-six that wine at 60 bottles and those 12 won’t be sold.

Company

Longer than that, you’re setting yourself to be on the losing end of a shrinkage problem. In a perfect world, though, your inventory is perpetual. Every time product is acquired or sold, your inventory updates in real time. According to the shrinkage statistics from the 2019 National Retail Security Survey, inventory shrinkage accounted for 1.38% of all retail “sales.” That’s almost 48 billion dollars. To give you some perspective, the entire wine industry has a market value of 70.5 billion dollars.

Divide the difference by the amount of stock recorded in the accounting books to get the percentage of inventory shrinkage. Inventory shrinkage occurs when the number of products in stock are fewer than those recorded on the inventory list. The discrepancy may occur due to clerical errors, goods being damaged or lost, or theft from the point of purchase from a supplier to the point of sale. Losses from shrinkage hit where it hurts most—your profits. In retail, where margins are tight and sales volumes high, losing inventory directly eats into your ability to make money. When items disappear due to theft or other reasons, you can’t sell them to recoup costs.

Employee theft

Use modern tools like a point of sale (POS) system that analyze sales data and tracks SKU inventory in real-time. These systems can flag unusual patterns or discrepancies, helping you catch problems early. Nope, losses add up over time and can affect your ability to grow and invest in your business. Regular audits and a good retail POS system with advanced retail inventory management features can help keep these mistakes in check.

Financial impact

The shrinkage loss or expense is computed by comparing the recorded inventory in the accounting system with the actual amount of physical inventory counted. This is why it’s important to perform regular physical inventory counts. If the accounting system has $100,000 of recorded inventory and the manager only counts $80,000 of inventory in the store, there is a $20,000 shrinkage loss. When shrinkage forces prices to go up to cover losses, it can drive price-sensitive customers away. Moreover, inventory discrepancies can lead to out-of-stock situations or incorrect pricing, which frustrates shoppers and damages trust.

1. Shrinkage is when a store loses inventory due to internal theft, external theft (AKA shoplifting), administrative errors, vendor fraud, damage, and cashier mistakes.
2. Theft, fraudulent returns and neglecting to scan items for friends and family lead to mismatches in your inventory levels and can add up to big losses for your business.
3. Of course, hiring loss prevention employees would work too.
4. There are literally tens of billions of dollars to be recouped.

Inventory shrinkage is a serious issue for many businesses. It is important to keep track of shrinkage because it indicates a potential problem in your business systems. Inventory shrinkage is the reduction in inventory over a period of understanding a bank’s balance sheet time that is not due to normal usage by customers. Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage. Unknown causes represent about six percent of the total inventory shrinkage.

Although employees should be at the forefront of preventing inventory shrinkage, some dishonest employees may steal from their employers. 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. Ever had someone bring back an item, only to realize later it wasn’t even from your store? Or worse, they “return” something they never bought in the first place.