What Is Inventory Shrinkage in Retail?

And, increase your Shrinkage Expense account to reflect your increased expenses. 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 at a manufacturer can slow or halt production if, for example, the manufacturer has fewer raw materials on hand than its inventory records reflect.

Whenever a SKU’s inventory levels are less than they were recorded to be for accounting purposes, there has been inventory shrinkage. Whether inventory shrinkage occurs because of theft, shipping damage, or human error, it’s in the best interest of your company to prevent shrinkage. For every piece of inventory that’s unaccounted for, you’re essentially throwing away money or losing product. It can lead to a drop in profits and require you to alter your accounting books, which will cost you even more time and money to fix. Some businesses decide to increase the price of their products to make up for profit lost to shrinkage. In other words, they’re passing on their costs to the next stop in the supply chain.

Human Error

To give you some perspective, the entire wine industry has a market value of 70.5 billion dollars. There are literally tens of billions of dollars to be recouped. 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. Once you have a better idea of the reasons for inventory shrinkage, you can help combat it with increased warehouse security and inventory tracking. It’s important to track your inventory shrinkage since the loss of inventory can cost your business money — and, ultimately, hurt your bottom line.

Make sure your SKUs are boldly marked and easy to find, both on the shelves and on the products. This will prevent the loss of product that happens when a stocker puts an item in the wrong spot. A big part of growing the profit is reducing the loss, which is why shrinkage should be a key focus in planning. The goal for retailers should be to reduce (and if possible, eliminate) shrinkage. Simply accepting shrinkage as a given and trying to make up for the loss in other areas can be a huge mistake.

What Can Be Done To Prevent Employee Theft?

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. It doesn’t take much shrinkage to make a noticeable impact on your business. An average shrink rate of 1.62% translates to $61.7 billion in losses across the industry.

• Unless you find a way to completely eliminate accidental damage, you’ll always have some inventory shrinkage over the course of your business’s lifetime.
• If you have errors in your accounting records, inventory costing methods, payments, or invoices it will snowball into inaccurate shrinkage rates.
• If so, you would need to file a claim with the Internal Revenue Service (IRS) using Form 4684 if you are located in the United States.
• What happens here is that a brand can’t sell a product that it does not actually have in the warehouse, which can lead to delayed orders and unsatisfied customers.
• Inventory shrinkage can be caused by theft, shipping damage, miscounting, and vendor fraud, as well as other factors.

A key way to prevent inventory shrinkage is to improve inventory tracking and accuracy. Doing this on a regular basis in a pattern can cut down on the time it takes. Inventory shrinkage can take place when items, such as expired produce, are naturally no longer sellable. To combat significant inventory shrinkage, you must familiarize yourself with what it is, why it happens, and preventative actions you can take. And when it does happen, understand how to make correcting entries in your accounting books. The initial action that a business should take to prevent inventory shrinkage is to implement a double-check system.

How do you reduce inventory shrinkage?

Once a new hire has been on-boarded, educate them on your policies and your stance on employee theft. Your balance sheet would show a credit to the inventory line item for the value that was lost. Showing that you have incurred higher expenses (cost of goods) and a lower gross profit difference between budget and forecast will lower your taxable income. However, you might choose to record your shrinkage separately instead of including it into your costs of good sold. If so, you would need to file a claim with the Internal Revenue Service (IRS) using Form 4684 if you are located in the United States.

But the vineyard only has 598 cases of wine to sell to the wholesaler. The process of bottling, labeling, packing, storing, and shipping the wine cause 2 cases—24 bottles—to disappear. You can even send customers real-time updates about their deliveries.

Module 10: Retail Operations: Managing the Store

Making up for the lost sales normally means raising prices or even cutting costs (employee salaries, headcount, benefits, etc.). This can lead to loss of customers and problems in keeping quality employees on staff. Retailers should place resources into loss prevention measures to avoid shrinkage and not accept it. Reducing inventory shrinkage is important for companies because it can have a significant impact on their bottom line. In fact, inventory shrinkage is estimated to cost businesses around $1 trillion each year.

You can reduce employee theft through careful hiring practices. In addition, security measures such as checking backpacks on the way out of work can reduce this source of product shrinkage. For retailers, shrinkage averages around 2% of total sales. This percentage seems small at first glance, but for big box retailers like Walmart, it accounts for millions of dollars in loss. If you have errors in your inventory counts when manually taking inventory, that screws up your shrinkage rate.

In this post, we will go through the reasons to calculate Inventory Shrinkage and factors that contribute to this cost. We will also look into measures to prevent loss, theft, and overall inventory shrinkage costs. 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). The shrinkage percentage is 5% [ ($5,000/100,000) x 100]. These increased prices are passed on to the consumer, who is required to bear the burden for theft and inefficiencies that might cause a loss of product.