Inventory Shrinkage in Retail: 4 Tips to Prevent It

Your determination can affect how the inventory shrinkage is recorded. If the loss is relatively small, it should be recorded as part of the cost of goods sold. However, a larger loss will be reported as a separate line on the income statement. How the loss is reported is left to the discretion of management.

BUSINESS IDEAS

It’s done by charging it to the cost of goods sold or by balancing the obsolete inventory allowance in the books. If you lose inventory to theft, or because a fire, flood or other disaster damaged your business, you can claim your loss as a tax deduction.

Customer theft, or shoplifting, is another cause of retail shrinkage that leads to billions in losses annually for retailers. Customers can steal items, switch price tags, fake returns, or otherwise steal from you. Theft, both internal and external to the company, continues to be the driving force behind retail inventory shrinkage, at 78.3% of all shrinkage in 2008. Of that portion, 42.7% is attributed to employee (also known as internal) theft and 35.6% was due to external theft, known as shoplifting.

The survey report noted that rounding of reported figures resulted in a total that exceeds 100 percent. Even in businesses with the best receiving procedures, warehousing abilities and tightest security, each item it receives and pays for isn’t going to be sold. A variety of reasons, from theft and breakage to warranty returns, will eat away at its inventory. Inventory loss, which is also known as shrinkage, is a measure of how much inventory doesn’t make it into customers’ hands.

POS systems that support unique staff logins, like Vend, give retail store owners a powerful tool to prevent employee theft-related inventory shrinkage. Assigning each staff member a unique ID makes it easy to track every transaction they make. POS systems like Vend let you see detailed reports, and see which staff member handles receipts, sales, inventory adjustment, returns, and even applied coupons to sales. If shrink is uncovered, like a stock receipt that doesn’t match the vendor’s bill, you can see who logged the receipt and investigate the issue. The inventory account must be reconciled at the end of each accounting period to account for the discrepancy in inventory count.

Administrative errors, such as errors in pricing, bad record keeping, or cash counting mistakes can all add up over time and cause a great deal of loss. You might think your employees are trustworthy, but many will steal from you given the opportunity—they might steal products, abuse their discounts, skim cash out of the register, or abuse refunds.

An excellent way to tighten up your bottom line and increase profitability is to address your inventory shrink. Retailers often employ special accounting treatments that aren’t seen in other industries.

Causes of Shrinkage

Generally, this is made as an adjustment to inventory and cost of goods sold. However, if the inventory shrinkage is determined to be significant, the loss must be reported on the income statement separately from cost of goods sold. Just make sure the loss is not double-recorded in this case by excluding the value of the stolen inventory from cost of goods sold.

An entry must be made in the general journal at the time of loss to account for the shrinkage. It accounted for 30 percent of overall shrinkage in 2017 – a big drop from 35.8 percent in 2016, but still significant. Administrator or paperwork error accounted for 21.3 percent of inventory shrink, while vendor fraud or error explains 5.4 percent.

The remaining 6.8 percent of inventory shrinkage was from unknown losses, the NRSS reports. Research from the National Retail Federation tracks shrinkage in retail and also tracks statistics related to loss prevention. Its 2017 National Retail Security Survey reports that retailers experienced an average of 1.44 percent inventory shrinking in 2017, up slightly from 1.38 percent in both 2016 and 2015. If you look at the instances of cash shortages, shoplifting, or missing inventory and match them with your employee schedules, you might see patterns. Perhaps money and products always go missing when two certain employees are scheduled to work together.

Once you calculate the amount of your loss, you can either include the amount as part of the cost of goods sold or as a separate adjustment to inventory. In either case, if you receive any insurance reimbursement for your inventory, you must reduce your claimed loss for the amount your insurer paid you. Limiting staff access to just the systems and areas they need to get the job done is very effective in preventing retail shrink from employee theft. With a POS system like Vend, you can assign specific permissions to staff IDs that allow or disallow actions like stock adjustments, price changes, and purchase order receipts.

Although businesses may never completely eliminate theft or damaged merchandise, several strategies may be employed to fight shrinkage. Providing employees a generous employee-purchasing policy helps deter employee theft, while requiring receipts for all returns may help curtail shoplift-and-return scams. Theft—by employees as well as shoplifters—was the leading cause.

What account is inventory loss?

Subtract the cost of goods sold from the total inventory to get the loss. If your cost is $320,000 and your inventory is $850,000, your inventory loss equals $530,000. Include the inventory losses on your income statement for the period. If the loss is small, you can include it as part of the cost of goods sold.

Something to think about is good hiring practices, which promotes employees with integrity. Once you have good employees, train them on shoplifting prevention, safe and reliable receiving processes, and how to properly use your upgraded inventory management system. Inventory shrinkage in retail companies is impossible to eliminate entirely, but you can minimize the damaging effects with a great plan.

  • Other areas of loss are due to paperwork errors, multiple inventory management systems, obsolete product, and damage.
  • Over 70% of all shrink was from theft by employees or customers.

Inventory control procedures and retail point-of-sale (POS) reporting tools help retailers spot, combat, and prevent retail shrink. With these tools, you can sit down and create a plan-of-action to prevent inventory shrink.

Preventing the loss of inventory is manageable and doesn’t need a large capital investment. Simply defined as the loss of physical inventory, shrinkage affects revenue in every business—especially in retail. Your company’s inventory shrink is the difference between your accounting records, typically from receipts and purchase orders, and physical inventory. According to the 2015 National Retail Security Survey, retailers lost $44 billion due to shrink. The loss of inventory equals the loss of profit and potential income.

Whether you need to sort, count, or store cash, there’s a technological solution that can help you improve accuracy and protect your assets. Inventory write-offs are done to support accounting accuracy objectives while also reducing the tax liability for business owners.

ACCOUNTING

Employee training is crucial for preventing shoplifting, explains RGIS Security, a firm that provides security services to retailers. Training your employees to recognize signs of likely shoplifters and requiring employees to greet customers in the store can help cut down on shoplifting. Employee screening can help you reduce employee theft, and auditing can identify pricing errors that would otherwise contribute to shrinkage from paperwork errors. If the shrinkage in your business’s inventory is significantly higher than the industry average, consider allocating more of your budget to loss prevention.

While it’s nearly impossible to eliminate shrinkage entirely, accountants and managers should keep track of shrinkage in an effort to manage it. Whether it’s caused by shoplifting, employee theft, or another reason, inventory shrinkage represents a $100 billion annual loss for retailers worldwide. Automated cash management technology is one of the most effective ways to reduce shrinkage in retail. Cash management technology reduces the touches that you and your staff have with cash, increasing the security and efficiency of your daily store operations.

Forbes Magazine describes how you can spot employees stealing from inventory (read our article on theft prevention). Determine whether or not the loss is large enough to significantly affect your business.

Inventory shrinkage is part of retail life, but there are many ways you can minimize inventory shrinkage and related losses. Retail shrink can be grouped into three different categories — clerical and stock management errors, internal (employee) theft and external (customer) theft. Theft-related shrink is by far the most common problem but clerical errors and stock mismanagement accounts for a fair portion, too. Retail inventory shrinkage is the difference between a product’s recorded stock count and the amount physically on-hand. Lost stock stems from theft or inventory control issues like receiving errors, unrecorded damages, cashier mistakes, and misplaced items.

How do you calculate inventory loss?

Inventory loss, which is also known as shrinkage, is a measure of how much inventory doesn’t make it into customers’ hands. While it’s nearly impossible to eliminate shrinkage entirely, accountants and managers should keep track of shrinkage in an effort to manage it.

This way, only employees that you trust can access shrink-sensitive data. You can also physically limit access to expensive goods and cash by locking storage areas, offices, and displays — and only give trusted employees or managers keys. Since employee theft accounts for nearly one-third of inventory shrinkage, according to the NRF study, it’s something that every retailer must address. Retail shrink from employee theft takes second place behind customer theft, according to the NRF report. Unfortunately, internal theft can be very difficult to spot and remedy.

BUSINESS OPERATIONS

Because inventory controls are so important to these companies, they have developed several methods for tracking and accounting for the flow of inventory, from production to final sale. Inventory shrinkage can result from several factors, including theft by either customers or employees. Learning how to account for stolen inventory will allow you to balance your inventory account with the physical count.

Since employees have access to extended areas of the store and know sales and inventory control processes, it’s easy for untrustworthy staff to steal goods under the radar. Marking sellable goods as damaged, stock receipt miscounts, sliding items to friends during checkout, and applying excessive discounts top the list for internal theft. Record an adjusting entry to balance the inventory account with the physical count.

inventory loss

Over 70% of all shrink was from theft by employees or customers. Other areas of loss are due to paperwork errors, multiple inventory management systems, obsolete product, and damage. Severe occurrences of inventory shrink can result in decreased bonuses for employees and changes in business operations.

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