It’s crucial to periodically physically count your on-hand inventory even with the most sophisticated inventory-management software. There will always be some of your inventory that is unaccounted for, ideally a small percentage. This is known as shrinkage in the retail industry. Keeping an eye on your shrinkage is crucial, not only for accounting reasons but also because it may indicate that you have issues with your store.
Shrinkage in Retail and Ways to Control it
What is shrinkage in retail?
When a company has fewer products in stock than what is listed on the inventory list, there has been shrinkage in retail sales. This typically denotes an accounting mistake, but it may also mean that there has been theft or inventory destruction. Retail shrinkage can be difficult to control because the products lost to it cost the business money and cannot be sold. This can result in lost revenue and, ultimately, less profit. It’s critical to determine the cause of shrink and put strategies in place to reduce or eliminate product loss or accounting errors.
Types of retail loss and how to prevent each
Here are some typical forms of retail loss and how to prevent them to assist you in identifying and eliminating them:
Shoplifting
When outsiders—those who are not employed by the company—steal inventory from a retail location, this is known as shoplifting. Shoplifting can take many different forms and involve items with different values. For instance, a shoplifter may act alone to steal a few dollars’ worth of merchandise or a group of shoplifters may work together to steal many items worth much more. They might conceal items on their person, like a small object in their pocket, or employ other strategies, like switching price tags and putting expensive items in a box with cheaper ones.
A shoplifter may engage in this offense once or repeatedly in any way. Shoplifting, in whatever form, can result in substantial inventory loss, which can lead to lost sales and lower profits.
Here are some ways you can prevent shoplifting retail shrink:
Employee theft
When people connected to a business steal from or defraud the company, it is called employee theft. This type of retail shrinkage can also take many different shapes. Employees will occasionally steal directly from a store by taking things or chasing after them. Employee theft can also occur when there is fraud involved, such as when an accomplice is purposefully underpaid.
The following are some strategies you can employ to try to stop employee theft:
Return fraud
When a product is stolen and then returned for a refund, this is known as return fraud. It can also happen when a used item is returned for a refund in violation of store policy or when a product was bought with fake money and returned for a refund. Because return fraud can occur in a variety of ways, it can be challenging to detect, but effective employee enforcement of return policies can help.
Here are some strategies you might use to stop return fraud:
Administrative errors
Administrative errors are mistakes in the accounting process that result in a discrepancy between expected and actual inventory during an accounting period, also known as human error. This unintentional form of retail shrink can be caused by typos, incorrectly labeled goods, and inaccurate discounts. Despite the fact that these mistakes aren’t deliberate, they can harm a company’s revenue and profitability.
Here are some suggestions for reducing administrative errors:
Operational loss
Operational loss, also known as waste, refers to losses that are typically unavoidable and accidental. For instance, broken merchandise in the store could be regarded as an operational loss. Expired food products are another form of operational loss. Although many companies consider operational loss to be somewhat normal in the course of doing business, it can be advantageous to reduce this type of shrink in order to increase revenues and profitability.
The following are some approaches you can try to reduce operational loss:
FAQ
What is retail shrinkage?
- Clarifying company policies.
- Train employees on theft prevention.
- Reduce human errors with checklists and reporting.
- Frequent inventory audits.
- Video surveillance.
- Hire a loss prevention manager.
- Triple-check your vendors.
How is shrinkage calculated in retail?
When a store has fewer items in stock than in its recorded book inventory, the accounting term “shrinkage” is used to describe the situation. Employee theft, shoplifting, administrative blunder, vendor fraud, product damage, and other factors all contribute to shrinkage.
What is a good retail shrink percentage?
Shrinkage is primarily brought on by four factors: employee theft, shoplifting, mistakes in administration, and fraud. The first step in reducing and preventing shrinkage in retail stores is to understand how it occurs.
