Inventory shrinkage is a widespread business issue, which is faced by every business if they don’t have the right solution for managing inventory. Businesses know but sometimes avoid that even a moderate amount of shrinkage can have a big impact on their business. That is why it becomes vital to know the reasons for the inventory shrinkage and the correct method to prevent it.
Technically, you can understand it as,
Inventory shrinkage refers to the difference between the physical count of your stock and the amount your records say you should have.
Effect of Inventory shrinkage in retail/wholesale
Inventory shrinkage or inventory loss is a major problem for businesses carrying physical goods especially retail/wholesale. According to the survey, it is estimated that companies lose approx. 6% of their total annual revenue due to employee fraud and other reasons for shrinking inventory. You should have a system that controls and monitors your inventory because there is no other way to detect the root causes that create shrinkage.
Thus, to prevent inventory shrinkage, you should aware of what it is, why it happens, and how you can prevent it.
This blog will give you detailed information to know and understand it.
What is inventory shrinkage?
Inventory shrinkage is the loss of goods. Loss of goods either due to theft, malfunction, or administrative errors on items moving from a construction site to the end customer. You can also say that this happens in your business when the physical count of your stock is different from the amount indicated by your records. This can be the result of many factors, such as employee/customer theft, wrong stock, inefficient record-keeping, shipping errors, or a combination of many of these reasons.
How to calculate stock shrinkage rate
Generally, businesses use the following formula to calculate inventory shrinkage.
Inventory Shrinkage Rate = (Recorded Inventory – Actual Inventory) / Recorded Inventory
Then, multiply your inventory shrinkage rate by 100 to convert it into a percentage.
Main causes of inventory shrinkage
The primary cause is shoplifting for goods
Shoplifting occurs when a customer exits a store with more than they paid money to the shop owner. This can be done inadvertently or consciously by either the store staff or the customer. According to the National Retail Federation’s annual survey, businesses lose about 35% every year. There can be various ways of shoplifting, including concealing goods, changing the price tag, etc.
Employee theft is another main reason
According to the survey, 33 percent of retail shrinkage is due to intentional internal theft by the staff. If your business has a dishonest staff, they will promote it instead of reducing your inventory shrinkage. There are many personal or professional reasons behind doing this, such as feeling underpaid, underappreciated, or undervalued.
That is why you must have a system that monitors your inventory.
Administrative errors, also one of the reason
Administrative errors are also one of the root causes of inventory shrinkage. Now, businesses are moving to digital from manual. But, those businesses who are still based on paperwork or those who are not having the right digital platform make many administrative errors in pricing mistakes, accidental reorders, missing or additional zeros, or left-out decimal points.
In this scenario, an efficient digital platform and technology with a barcoding system are recommended for the proper calculation of stock.
Supplier fraud is also a common cause of inventory Shrinkage
Many times it happens that the businessman gets the wrong/less shipment of stocks from his supplier/vendor end. In such a situation, the businessman gives the full amount of the stock but he suffers a loss with less stock. In such situations, the wrong entry of stocks in inventory is certain and the probability of inventory Shrinkage is certain.
Therefore, it is necessary to have a software system that gives space in the inventory only after adding stocks and proper detailing of the stocks.
Operational loss can also become a cause for Shrinkage
There may be many unexpected events in the business that can have an impact on shrinkage. For example, your product from a customer/staff member is broken and not salable. Or some cases may also be about expatriate products, such as food products. This loss is considered unavoidable and comes with the cost of doing business.
What will happen to your business if you have not noticed inventory shrinkage?
Accounting is essential to avoid inventory shrinkage. This ensures the growth of your business. Accounting shows where your products are being used, how much profit/loss you are making.
Also, accounting is the only way to increase the cost of goods sold by marking incorrect values on accounting reports. The business loss resulting from this is as follows.
- Product loss
- Wastage of money
- Incorrect accounting / tax calculation
- Disappointed customers
- Corporate credit decline
Ways to prevent inventory shrinkage that leads to big business loss |
Implement a system that double-checks stocks entry
It is the most straightforward way to prevent inaccuracy in the management of stocks. Double-checking the stocks helps businesses identify any kind of inventory shrinkage in the early stage. This way, business owners get enough time to prevent their business from any shrinkage.
Give your products unique identities
In this technique, a business owner needs to provide every product a unique identity. It helps businesses in identifying the status of the products in which you will get product information and their status. Now, many software solutions are available in the market that equipped with barcode system. The barcode system gives every product a unique identity and eases billing and inventory management.
Conduct employee training for better business understanding
As a business owner, you can organize training programs for your staff members. With this, you will be able to tell them about your business in the right way. Also, you will be able to explain how you want to manage the business without any loss.
Automate inventory management processes with the suitable software solution
In today’s technological age, it has become extremely essential to have a software solution. The software provides a way to manage the business. Through this, you can find real-time stocks, customers, vendors, sales, purchases, etc. It automates all the operations related to inventory and facilitates close information and tracking of stocks. In this way, you can reduce inventory shrinkage.
Plan for critical time or sudden increase in customer demand
It can be especially difficult to calculate accurately and record stocks during peak periods, festivals, or when demand is high. Employees are under pressure and make wrong entries while solving returns and increase in exchange. Hence, making sure that you are adequately prepared for such critical times, becomes crucial. That is why you need to adopt a system that gives you real-time updates and manages inventory levels efficiently.
Track inventory shrinkage from time to time to avoid any big loss
If you are experiencing any kind of inventory shrinkage in your business, then it becomes your responsibility to get the solution out as soon as possible. Examine why this is happening and update the business strategy accordingly.
Wrapping Up
When people know they are being tracked, they are afraid to do something wrong. Similarly, to prevent shrinkage in retail, you must have an effective inventory management system, alert you from time to time and save you from loss.
If you are looking for such a solution, then contact SWIL today and get countless business benefits.
