Finally, pay employees fairly and strive for good morale in your retail environment to promote solidarity and trust between the company and your team. Give workers the tools they need to expedite the payment process and create line item reporting stockholder equity records for every item sold through point of sale (POS) system software. The best way to calculate shrinkage rate value is to subtract the total value of your current inventory from the total value of inventory you’re supposed to have.
Inventory shrinkage is when you lose inventory due to factors other than sales. It can generally be defined by the difference between your inventory levels on paper and your actual inventory levels. Every retailer across every industry is impacted by shrink, with organized retail crime being one of the industry’s prime concerns (but not, notably, the only cause of shrink). To help prevent shrinkage, businesses can conduct inventory audits, install surveillance cameras, thoroughly review vendors, and set up theft prevention training for employees. Explore some software options to determine which best suit your business and then try a few of them out.
Inventory Shrinkage
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. The inventory KPI for inventory shrinkage is the shrinkage rate, which measures the percentage of inventory loss as a result of shrinkage. It is an important metric to monitor and minimize to ensure efficient inventory management and profitability. For example, if a retailer accepts $1 million of product, then the inventory account increases by $1 million.
Every time you sell an item, the value of your inventory on hand is reduced by the price of that item. Conversely, whenever you place a new order of stock, the value of your inventory increases by the amount you ordered. Your shrinkage is whatever discrepancies arise between the sales and orders you have recorded and the actual value of the inventory you have on hand. 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). Sometimes all of your investigative work comes up with nothing, and you just chalk it up to “unknown” — which is the case 3.9% of the time.
AccountingTools
This one is pretty self-explanatory, but if perishable products aren’t used by their expiration date, they contribute to inventory shrinkage. In our example, the wine bar isn’t able to sell the last half case of wine before the 3-year expiration date. Those 6 bottles, lost to the ravages of time, are shrinkage. 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.
Book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer. When a retailer receives a product to sell, it records the dollar value of the inventory on its balance sheet as a current asset. This can trigger substantial additional costs to bring in replacement inventory on short notice.
The first step is to diagnose so you can come up with a solution. Generally, the reasons for inventory shrinkage fall under four main categories. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. In restaurant kitchens, shrinkage refers to the difference between the amount of food you acquire from wholesale food distributors and the amount of food you sell to customers.
If you set the right par levels, you won’t have sitting inventory marching toward its expiry date. And that also means you’ll clear up more shelf space for other, more profitable products. Vendor fraud is alternatively known as supplier fraud or wholesaler fraud.
- A powerful inventory management software platform with the latest features and tools will help you get more organized and less likely to lose track of inventory.
- This type of shrinkage is especially hard to solve because any plan of attack is based on faulty information.
- 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.
- If, for example, a Grand Cru wine was ordered but the vendor filled the order with a Premier Cru of the same vintage.
- Restrict access to certain parts of the warehouse to only those employees who need it, making it easier to narrow down the suspects if you do have an issue.
However, if the inventory shrinkage percentage increases over time, then the company should review the measures they have implemented to identify and correct any potential problems. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage. But 11% of retail businesses report shrinkage rates at or above 3%.
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. In 2017, the NRSS reported that external theft or customer shoplifting were responsible for 37.5% of retail shrinkage. And 33.2% of retail shrinkage was caused by employee or internal theft. That means theft accounts for roughly .98% of all retail sales and a total of almost 34 billion dollars. If the shrinkage percentage has decreased over time, it shows that the company’s inventory management techniques have reduced stock shrinkage.
What Percentage of Shrinkage Is Caused by Theft?
Likewise, and it doesn’t have to be a perishable item, if any product is damaged beyond the point of reselling, it will increase your shrinkage percentage. Returns and exchanges contribute to damage-based shrinkage substantially, especially as one of the causes of retail shrinkage in traditional, non-hospitality retail environments. 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. If a consumer is price sensitive, then shrinkage decreases a company’s consumer base, causing them to look elsewhere for similar goods. If products are going missing, inventory theft is a strong possibility.
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. 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. The fashion industry is a master at this—just think about those ink-blot tags many stores use, making it difficult to make use of stolen goods without ruining them. For bigger ticket items, you could attach item tracking tags that are deactivated by staff when customers check out.
A loss of inventory ultimately translates to a loss in profit, diminishing your bottom line. By calculating your shrinkage percentage rate, you can determine the reasons behind your inventory loss and take steps to address the root causes. If you have errors in your accounting records, inventory costing methods, payments, or invoices it will snowball into inaccurate shrinkage rates. No matter what industry you’re in, there are numerous software solutions for your business. Whether your products are all sold in bulk with an MOQ (what does MOQ mean?) in place or not, automation can help.
A dedicated inventory management software program will help reduce manual handling of stock and cut down on inventory shrinkage. 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).
Once you’ve settled on a new platform, run a pilot program to see how your inventory shrinkage rate changes over time. Vendor or supplier fraud is less common — comprising 3.7% of inventory shrinkage cases — but it does happen. If you’ve ruled out theft and administrative errors, investigate whether your supplier is abiding by your contract and that your numbers match up. Inventory shrinkage is a https://www.kelleysbookkeeping.com/recognition-of-accounts-receivable-and-revenue/ problem for businesses that run into problems filling orders and accounting for the missing inventory. Inventory shrinkage costs can be significant and may cost a business thousands of dollars per month or more, depending on how much product the company moves. To calculate the shrinkage rate percentage, divide your inventory shrinkage value by your recorded inventory value, then multiply by 100.