What is Inventory Shrinkage and 7 Ways to Reduce It

It also helps in tracking which product is in more demand in comparison to others. 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.

  • To form a comprehensive picture of shrink, retailers must first take a step back and take stock of each of the sources and drivers within their organization.
  • On the employee theft side of things, conducting surprise audits can prevent employees who are stealing from being prepared.
  • In this comprehensive guide, we will delve into the concept of inventory shrinkage, learn how to calculate it, explore its causes, and discover effective strategies to prevent it.
  • Every time product is acquired or sold, your inventory updates in real time.
  • However, the scope of reducing the temperament of carelessness can turn the wheel around to reduce Inventory shrinkage.

But Flowspace’s platform goes beyond just tracking supply chain KPIs; Flowspace’s platform gives retailers actionable insights in order to improve and optimize their inventory KPIs. Employees have direct access to all a brand’s products, and poor inventory count, warehouse management and security can result in employee theft. Employee theft can be a bigger concern for ecommerce businesses without a retail store — which limits shoplifting. A large amount of inventory shrinkage can also impact how lean a business can be with inventory levels.

Ways to reduce warehouse shrinkage

Your company can proactively reduce missing inventory by installing security cameras in critical areas to double checking during inventory counts. In accounting, you’ll want to record retail shrink in your inventory to reflect the fact that there was a loss in value. Conversely, debit your shrinkage expenses account to indicate the increase in expenditures for student loan interest deduction your business. To calculate the shrinkage rate percentage, divide your inventory shrinkage value by your recorded inventory value, then multiply by 100. According to a Sensormatic study, shrinkage rates fluctuate widely from industry to industry. Stores in the consumer staple sector encounter a higher degree of wastage or spoilage, as perishable goods expire.

  • One recent case that made headlines was a school food service director who stole $1.5 million worth of food, mostly chicken wings, over a few years.
  • Accounting for inventory shrinkage is critical for an ecommerce business.
  • The wholesaler stocks it, scans it, inventories it, sells it, and ships it to hundreds of individual retailers.
  • Hired employees should undergo rigorous training on how to handle inventory appropriately and carry out stock-taking.
  • Every piece of inventory that’s on a brand’s book but can’t be physically found represents lost revenue.

Inventory shrinkage is the difference between a product’s recorded stock count and the amount physically on hand. The difference between these two amounts is referred to as “shrink.” In a retail setting, it is also sometimes called retail shrink. Either way, both mean the same thing—you’re missing inventory you thought you had. Monitor your inventory by calculating your shrinkage rate periodically, like once a month.

Calculating Inventory Shrinkage

Double-checking counts and using barcode scanning systems can further improve accuracy and reduce human errors. Some problems with inventory management stem from lack of training. Make sure all your employees understand your processes and implement them properly. While training time may seem unproductive, it will improve your bottom line if it reduces your shrinkage rate. Inventory shrinkage is recorded when there is a difference between the amount of inventory you had on your accounting books and the physical count of inventory in the warehouse. This may appear as a discrepancy between products recorded as shipped from your manufacturer and what is noted as received in the fulfillment center.

What is Inventory Shrinkage?

It will track the location of the inventory from the point of origin to the point of sale, count the number of keystrokes, and produce logs for all the users who logged into the system. Getting a second person to verify the records helps prevent inaccuracy and omission of key details. A double-check system also helps to identify loopholes that may contribute to stock shrinkage and to implement measures to curb fraud. In most cases, the employer may not notice when one product disappears from a huge stock of over a thousand items. Instead, the employer/accountant will assume that the product went missing due to clerical errors during packaging or when loading goods onto a truck. Ordering too much of a product can be worse than ordering too little.

Human Error

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). Inventory shrinkage occurs when the number of products in stock are fewer than those recorded on the inventory list.

What Is Shrinkage in Inventory?

While 1.4% might seem like a low value, this amounted to over $94.5 billion in losses that year. You can use our shrinkage calculator below to determine the shrinkage your business is experiencing. And continue reading to learn how to calculate shrink by hand, review the causes and impacts of retail shrink, and explore ways that you can prevent loss in the future. Inventory shrinkage can take place when items, such as expired produce, are naturally no longer sellable. Internal theft accounts for 28.5% of shrinkage, according to the National Retail Federation.

It conducts a physical inventory count, and calculates that the actual amount on hand is $950,000. The amount of inventory shrinkage is therefore $50,000 ($1,000,000 book cost – $950,000 actual cost). The inventory shrinkage percentage is 5% ($50,000 shrinkage / $1,000,000 book cost).

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