What Is Inventory Shrinkage & How Do I Prevent It?

You can do this in a cyclic manner to minimize the amount of time it takes, but it’s very important to track and manage your inventory. It’s a best practice to use technology that can keep inventory counts update in real-time rather than in Excel, which is static and not synced to anything. Ready to get your business organized and do more to prevent inventory shrinkage? Say you work at a car dealership that sells surfboard racks. According to your inventory records, you have 75 sets of racks on hand.

You may have adjusted the quantity without reducing it when sold which causes the amount to go higher than your actual inventory. Kindly share more information so we can provide the right solution in resolving the problem. If you’re losing track of inventory, it may be nothing nefarious at all — just employees who aren’t properly trained. Meet with employees responsible for tracking inventory and review the processes they follow. If you find they have knowledge gaps, institute a training program. Consider shopping around for commercial-grade security systems If you own a large retailer.

How To Spot and Prevent Shoplifting In Your Store

However, inventory is often lost due to any number of reasons, causing a discrepancy between the book inventory and the physical inventory. The difference between these two inventory types is shrinkage. Divide your inventory shrinkage value by the total value of your recorded inventory, then multiply by 100. 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.

Double-check systems
Improve your inventory accuracy by implementing daily or weekly stock checks and receiving counts. Ensure that your team alternates counting duties to deter mistakes or even dishonest employees from reporting false inventory records. Double-checking ensures that two workers conduct inventory counts simultaneously, then compare numbers to guarantee accurate results. To calculate the shrinkage rate percentage, divide your inventory shrinkage value by your recorded inventory value, then multiply by 100. Every piece of inventory that’s missing is essentially lost sales and money for your business, and should be considered an expense. Whether inventory shrinkage occurs because of theft, shipping damage, or human error, it’s in the best interest of your company to prevent shrinkage.

Fortunately, modern inventory management software like Sortly is simple to set up—and can make it easy to compare inventory records to the actual results of your inventory audits. With Sortly, you’ll always know how much inventory you have on hand, where it is, and what condition it’s in. Shrinkage is the loss of inventory that can be attributed best construction accounting software to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error. Shrinkage is the difference between recorded inventory on a company’s balance sheet and its actual inventory. This concept is a key problem for retailers, as it results in the loss of inventory, which ultimately means loss of profits.

While $100 may not seem like a lot in the grand scheme of things, it does represent 2% shrinkage, which is above the 1.4% average shrink found in retail sales. If it continues long-term, say every month for 12 months, it could lead to a serious loss in profits. Your inventory management software shows you should have 50 lbs.

Businesses experiencing a particularly high theft rate can also hire a team of security guards to patrol parking lots and entrances. If you’re interested in learning how Lightspeed Retail POS could help you cut down on administrative errors and speed up how you work, let’s talk. One of the best ways to cut down on human entry error is to remove the human entry part. With a fully connected inventory management and point of sale system, you can worry less about mismatched numbers.

Inventory shrinkage definition

Alternatively, you can install a custom system according to your needs and budget in order to reduce theft and any unwanted access to your warehouse to bring down Inventory Shrinkage. A lot of hardware systems with software support are available in the market to safeguard your inventory from being stolen. These systems may include CCTV cameras, intrusion detection, door auto lock systems, door access control and so many other features.

#6 Automated Inventory Management

By being insiders of the company, they may quickly cover up the theft of inventory. For example, if a retailer accepts $1 million of product, then the inventory account increases by $1 million. Every time an item is sold, the inventory account is reduced by the cost of the product, and revenue is recorded for the amount of the sale.

Which Accounts are Affected by Inventory Shrinkage?

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. According to a study from the National Retail Foundation, retail businesses lost $62 billion from “shrink” in 2019, amounting to an average of 1.6% of sales. In QuickBooks Online, you’ll have the option to manually adjust an item’s quantity on hand without recording a purchase or sale to match your actual stock. The software will automatically create an Inventory Shrinkage account after saving the adjustment. This is a default account where all the adjustments or changes you’ve made are recorded.

The most obvious problem is that inventory gets lost and can’t be retrieved. Since many products don’t have GPS trackers on them, you won’t know where they end up. You may want to consider hiring a security consultant to determine how to protect expensive inventory without sacrificing productivity or access at your place of business. If your business stocks expensive inventory or assets, you might consider storing them in an area with extra security. Some companies lock high-value items behind closed doors, while others move the highest value items offsite altogether.

Count inventory often

Deliveries should be counted every time they enter or leave the business premises and recorded appropriately. 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). In addition, shrinkage can increase a company’s costs in other areas. These costs work to further reduce profits, or to increase prices if the expenses are passed on to the customer.

If you’re using a POS system like Lightspeed, you can check your inventory levels and past cycle counts at a glance, making it simpler to monitor potential shrinkage rates. 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. Accounting for inventory shrinkage is critical for an ecommerce business. The most important impact of shrinkage is that lost products can’t be sold which directly results in lost revenue. If a brand’s inventory reports don’t match sales records, someone needs to spend time reconciling accounting records. Employees have direct access to all a brand’s products, and poor inventory count, warehouse management and security can result in employee theft.

The inventory count should be compared to the previous inventory counts. 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 the Cost of Goods Sold (COGS) account. Shrinkage is caused from the loss of inventory due to shoplifting, administrative error, employee theft, vendor fraud, and broken items, among other reasons. Explore some software options to determine which best suit your business and then try a few of them out.

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. 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.

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