What Is Inventory Shrinkage & How Can You Prevent It?

What Is Inventory Shrinkage And How To Prevent It?

Here are the 5 most common themes we got when it comes to controlling shrinkage. Remember, shrinkage is not a good form of inventory reduction. And finally, a medium-sized wine bar receives their shipment of 6 cases from the wholesaler. They put the wine in their cellar, open the first case, and begin selling it to guests. At some point the wine bar takes beverage inventory and finds they’ve sold 40 bottles and have 31 left. Imagine a small, 5-acre vineyard that produced 600 cases of wine this harvest.

  • That’s three times the industry median shrinkage rate of 1%.
  • It can be a legitimate vendor that deliberately bills for more than what it delivered.
  • Prepared for peak sales periods ahead of time means you’ll have the proper systems in place to continue to manage inventory levels efficiently when demand increases.
  • It’s vital to keep the SKUs consistent across sales channels, warehouses, systems and anywhere else being used.

You can make the inventory management process easier by assigning each product a unique identifier. Whether you label your products with serial numbers, Global Trade Item Numbers or bar codes, unique identifiers help you tell similar products and equipment apart. If you don’t keep warehouse employees up to date on inventory process, you could be setting yourself up for some inventory shrinkage. Some warehouses can operate without the need for any digital inventory processing tools. For example, if your warehouse only houses a single product line, or products for a single retailer, you may have enough time to track inventory updates manually.

Human error/accidents:

When a business discovers a shrinkage in its inventory, any discrepancies should be accounted for to reconcile the records with the physical inventory count. The matching principle requires that inventory shrinkage should be recorded as an expense in the financial period in which it occurred to match it against the revenues for that year. A shrinkage expense account will be recorded under theCost of Goods Sold account. Prevent damaging new product through improvements to your receiving and stocking processes.

Use this shrinkage calculation to track your shrinkage rate over time. Understanding and anticipating lost products is essential for realistic inventory management. One way to reduce the risk of inventory shrinkage is to conduct a surprise physical count of inventory from time to time . A surprise physical count ought to take place entirely at random in order to prevent any pre-planning or manipulation. They will allow you to get a clear picture of what’s really happening in your warehouses or distribution centers without having to count every item on hand. Maybe most importantly, this kind of software provides detailed tracking and a trail data markers that can be used to find the root cause of shrinkage within the supply chain.

Additional Resources

Giving each product a SKU allows workers across the business to track inventory levels more efficiently. Also, placement of product within your store, such as keeping expensive items locked in a case or toward the back of the store, What Is Inventory Shrinkage And How To Prevent It? prevents the quick grab-and-run. These easy and cost-effective steps can avoid the installation of a large scale security system or hiring a team of security guards. Every piece of inventory that is lost is money down the drain.

How can you prevent shrinkage?

  1. Continuously Track Stock.
  2. Implement Checks And Balances.
  3. Install Obvious Surveillance And Anti-Theft Signage.
  4. Use Anti-Shoplifting Devices: Security Tags.
  5. Implement Thoughtful Store Layouts.
  6. Monitor Your Cash Management Practices.
  7. Have An Intelligent Return And Exchange Policy.
  8. Audit Your Hiring Practices and Training.

Issue access control cards instead of keys to your employees. You can easily track the use of access control cards — plus, they cannot be duplicated. Just be sure to deactivate any missing, lost, or stolen cards immediately. And limit the use of these cards to employees only — all contractors or cleaning services should sign out and return cards each day. And make sure only essential personnel have access to your stock room.

Causes of inventory shrinkage

The more tasks that are handled manually, the greater the chances errors will occur. Any business in the food service industry, such as food manufacturers, restaurants, https://kelleysbookkeeping.com/ bars and grocery stores, can expect shrinkage. Food and beverages expire if not used or purchased within a short window of time and have to be disposed of.

  • That means theft accounts for roughly .98% of all retail sales and a total of almost 34 billion dollars.
  • When your business experiences shrinkage, you must adjust your accounting books.
  • With the help of their cashier friend, he/she would refund the item at a higher price than what was initially paid.
  • On average, American retailers lose roughly 1.33% of sales each year due to inventory shrinkage.
  • This can be done by you and your employees or by an outside inventory company.

One of the occasionally frustrating concerns faced by every business is managing inventory effectively. But for many companies, the most challenging part of inventory management isn’t dealing with what’s on hand, but what isn’t. For businesses that sell physical things, some amount of shrinkage is unavoidable. At point of sale, stores can experience retail shrinkage from breakage and shoplifting.


Like most other business losses, inventory shrinkage impacts your bottom line. In order to discover precisely how inventory shrinkage has affected your business, you’ll need to calculate, track, and monitor it over time. For every piece of inventory that’s unaccounted for, you’re essentially throwing away money or losing product.

  • A journal entry also needs to credit to the inventory account for $50,000.
  • Thereby, it helps eliminate administration and paperwork errors to prevent inventory shrinkage.
  • Self-Employed The tools and resources you need to run your own business with confidence.
  • Maybe someone is taking cash from a drawer or a bottle of liquor from behind the bar.

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