When someone discovers that products are missing, no one knows where they are. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. With the use of proper software, you most definitely see the depths of your issue and resolve it with efficiency. Also, you can scan the other features like inventory tracking and product listing, to make sure you are always virtually aware of your good flow.

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.

Acceptable retail shrink rates typically fall between 1% to 2%, with the industry average landing at 1.4% in 2021. 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. The software will hold all parties involved in the inventory management process accountable.

Prevent Vendor/ Purchase Order Fraud

Organized retail crime, where two or more people conspired to steal merchandise to resell, also falls under the shoplifting label. Examine the financial health of your business by highlighting exactly how much revenue is being generated versus what’s being spent. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. For example, certain doors could require a keycard that only some employees have so others — such as those doing general warehouse maintenance — would not have access.

• To calculate the shrinkage rate percentage, divide your inventory shrinkage value by your recorded inventory value, then multiply by 100.
• According to one study, 67% of asset protection managers reported a moderate to considerable increase in ORC.
• Shrinkage is the difference between recorded inventory on a company’s balance sheet and its actual inventory.
• Inventory shrinkage management should be a priority for your business.
• We will also look into measures to prevent loss, theft, and overall inventory shrinkage costs.
• However, every retail store owner eventually comes across a less-than-honest employee.

Divide your inventory shrinkage value by the total value of your recorded inventory, then multiply by 100. The reduction or elimination of shrinkage grows profits, keeps costs down, and prevents having to recoup lost dollars from areas like payroll production resources. Suppliers have arrangements with retailers on items they will accept in return for credit. If an item is damaged in the store and it can not be sold or returned to the supplier, it becomes shrinkage. The shrinkage factor isn’t the only reason it’s a good idea to shorten the time it takes to log your shipments into stock. Products sitting on the loading dock aren’t available for sale, so they aren’t making you money.

Shrinkage impact

A lot of inventory shrinkage comes from poor tracking processes. Fortunately, business owners don’t have to be held hostage to shrinkage. Here are ways to prevent inventory shrinkage in your own warehouse.

You could even end up with backorders of goods that you have in stock because of receiving delays. Plus, the sooner your products are on the shelves, the less the chance for loss of product. Or debits and credits warehouse shrinkage can occur when inventory is logged in at the receiving dock but isn’t found on the shelves. Often, product shrinkage comes to light when you are physically counting stock.

Inventory Shrinkage: Definition & How to Prevent It

To prevent inventory miscounting, double check your numbers. You might involve another employee so you can compare your numbers. First, calculate your cost of goods sold and subtract the amount from your inventory. Subtracting your cost of goods sold from your inventory shows your inventory’s book value, or the recorded amount. Inventory shrinkage might seem trivial but it can have a massive impact on your business.

How to Keep Up with Holiday Retail Trends

Although, it is wise to make sure you record as little inventory shrinkage rate as possible. Flowspace’s inventory planning and forecasting software gives brands real-time insights and recommendations for inventory optimization. Having access to real-time data allows brands to perform those all-important surprise audits on physical inventory without alerting employees.

Inventory shrinkage FAQs

While shrinkage is usually unpredictable, it can be controlled when appropriate safeguards are put in place. 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. Cycle counting refers to the practice of counting a small amount of your inventory on an ongoing basis. You might do a weekly count of 10 different SKUs, for example, or you might pick 20 particular SKUs to count weekly for a month to monitor stock level changes for those products.

For example, Brjo Footwears had 2546 pairs of sandals and shoes, but upon a stock count, they found only 2120 pairs actually present in the store. This loss is referred to as ‘Inventory shrinkage’, and it is highly important to take immediate steps for retail loss prevention. If you have errors in your accounting records, inventory costing methods, payments, or invoices it will snowball into inaccurate shrinkage rates.

Supply Chain’s Moment of Truth Has Arrived Video!

Statistics say employee theft holds 42% of the inventory shrinkage of the company or the business. The reason is, the employees are in the closest proximity of the inventory, and can find loopholes in the security (in the warehouses/stores). Overcoming this situation may be tough but is not impossible. Whether due to theft or clerical errors, inventory shrinkage is a part of retail, but that doesn’t mean you shouldn’t try to prevent it.

If your shrinkage rate suddenly increases, look into possible causes. Inventory shrinkage is when your business has less inventory (e.g., goods) than what you recorded in your books. Although some inventory loss is generally a normal part of running a retail business, high inventory shrinkage can indicate underlying problems. Marking sellable goods as damaged, stock receipt miscounts, sliding items to friends during checkout, and applying excessive discounts are some of the ways internal theft takes form. Later, we will look at some of the ways you can deter employee theft, from making a pleasant work environment to installing access controls.