Cycle counting is more of a warning system than an inventory shrinkage deterrent in and of itself, however. It helps you pinpoint where shrinkage may be happening and if you need to invest more in your loss prevention strategies. Vendors can be subject to the same administrative errors as retailers, which can contribute to shrinkage. Both you and your vendors can the risk of human entry error by using online B2B platforms like NuORDER. It is an unimaginable feeling when you purchase goods for your store and few of them go missing.

Assign two different employees to keep a check on the inventory, prepare reports, analyze, and match them often. This way, it becomes extremely easy to keep track of the liquidity of the products. It also helps in tracking which product is in more demand in comparison to others. Now subtract total inventory in the stock from inventory mentioned in the books. Get in touch with Flowspace today to learn more about inventory management solutions.

Common Causes of Inventory Shrinkage

Inventory shrinkage is when your actual inventory is lower than what your books say it should be. This can happen due to theft, supplier error or fraud, product damage, human error while counting inventory, or other reasons. If one of the wine bottles is dropped and shatters, that’s loss of merchandise.

Once you’ve settled on a new platform, run a pilot program to see how your inventory shrinkage rate changes over time. Inventory shrinkage is when the amount of product a business actually has available is less than what is shown in the accounting records. This discrepancy indicates that there has been theft, miscounting of products, damage, or other issues. Yes, record inventory losses as an expense in your financial books. Increase (or debit) your inventory shrinkage expense account, and decrease (or credit) your inventory account by the value of your losses.

  • Inventory Shrinkage can affect your business on many levels.
  • A lot of inventory shrinkage comes from poor tracking processes.
  • Miscounts, damage, fraud, or theft can all lead to an inventory shrink.
  • Inventory shrinkage is when the amount of product a business actually has available is less than what is shown in the accounting records.
  • How do I fix the inventory and get on the right track instead of creating a ginormous expense.

In the good news, we have ample ways to turn the inventory shrinkage around. We have described 7 solid ways in which the process can be altered to make sure the inventory is safe on its grounds. The products coming in tiny packages are easy to swipe inside a bag or underneath what is business accounting clothes. To show the loss in the book, show an increase in shrinkage account and decrease in the inventory account. If the loss occurred is small, debit it in the cost of goods sold account (COGS). If the loss occurred is large, it will need a specific account.

Shrinkage at the Manufacturer

As rightly said by Alasdair McKichan, President, Retail Council of Canada. The role of a good inventory system is to access the visibility of products in one place. It also keeps track of the product movement and tracks the location of the product to the bin or shelf number. Well, imagine Joe’s Accessories has 5200 pieces of inventory, how will he keep track on a regular basis? He can start by using a tagging system and tag every product.

Money thrown away

As such, an acceptable inventory shrinkage rate is as small as possible. 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). Even a moderate amount of shrinkage can have a big impact on your business, which is why it’s important to get your shrinkage rates as low as possible. Inventory Shrinkage can affect your business on many levels. You must lower your inventory shrinkage issues and increase your profits.

Hence, it is evident for retailers to take steps to prevent this unwanted loss that brings down their profitability. The good news is there are a lot of ways to prevent inventory shrinkage. Any combination of these methods may work depending on whether you are warehousing products or have your own storefront. Shrinkage in business can take a bite out of your bottom line. Understanding the causes of losses and how to prevent them will boost your profits. The best way to explain inventory shrinkage is an example.

Employee Training and Incentives

Accounting for inventory shrinkage is crucial to growing your business. Without knowing where your products are going, you can lose out on profits, risk misrepresenting your value on accounting reports, and increase your cost of goods sold. Sortly is a top-rated inventory management software solution perfect for businesses looking to reduce inventory shrinkage. If you’re currently using an inventory spreadsheet or a piece of paper to track inventory, keeping accurate inventory records can be a real challenge. And when a business can’t quickly review inventory on hand, calculating and keeping an eye on inventory shrinkage rate is virtually impossible.

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. Once you’ve performed your surprise audit of a small batch of inventory, you can calculate a quick inventory shrinkage rate.

It may involve only one employee, or it could include a small group of workers. To find out how large your inventory shrinkage is, you’ll need to calculate it. Then you’ll know how best to expense it for your business and whether you need to take steps to reduce it. Clerical errors like this also lead to premature ordering and, eventually, sitting inventory that takes up shelf space. This type of shrinkage is especially hard to solve because any plan of attack is based on faulty information.

It is that time when you realize that you have incurred a loss, and your valuables are gone. With inventory shrinkage, companies lose their goods, and are not able to retrieve them ever. As your ecommerce business grows and inventory becomes too expensive or challenging to manage in-house, consider using an expert ecommerce fulfillment company to help you. Inventory shrinkage management should be a priority for your business.

The next most common reason for inventory shrinkage is administrative, at 15.4%. This includes simple errors on the part of your staff such as miscounting, paperwork mistakes, or not factoring in things like inventory turnover ratio. Simple signage lets consumers know about CCTV cameras, and employees can frequently check in with customers to deter shoplifting even further. Installing security cameras in employee-only areas, such as stockrooms and break rooms, can also decrease internal theft.

The company should contact the references and past employers to know the behavior and general conduct of a prospective employee. Nearly 30% of retailers reported that ecommerce crime has become a much higher priority over the last five years, followed by organized retail crime (ORC) (28%) and internal theft (20%). The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Explore a mentorship program if you have both experienced inventory workers and newer unskilled staff members. The latter can learn from their more experienced colleagues how to properly track and inventory items to reduce mistakes. Large airlines can’t afford to have even one crash, yet they make thousands of flights each day.