What Is Inventory Shrinkage?

As a business, your primary goal should be to serve your customers well, which you can accomplish through staying organized and accurately managing your inventory.

If you find your company experiencing inventory shrinkage, take the time to reevaluate your company practices. By remaining aware of your options, you can formulate a plan to prevent future inventory loss. 

Inventory Shrinkage Explained

Inventory shrinkage is a loss of inventory that can occur as a result of various thefts, errors and damages. In short, it’s when you’re missing inventory you thought you had. You’ll notice shrinkage has occurred when your business’s inventory records don’t match your physical inventory. 

Loss of inventory can occur for a variety of reasons, including: 

  • Employee theft: Employees have close access to the products you sell, meaning they may easily be able to steal inventory. While shrinkage concerns shouldn’t threaten your rapport with employees, be aware of this possibility so you can work to prevent it through organization, security and positive work environments. 
  • Shoplifting: Many customers successfully steal products while shopping, which can also deplete your inventory. 
  • Vendor fraud or error: Shrinkage may also occur if your business receives less inventory than planned from a vendor, whether by accident or as a result of intentional issues. 
  • Misplaced items: Disorganized warehouses or retail floors can cause inventory that’s unaccounted-for. You might be certain you purchased a specific amount of products, but might still not find physical inventory to match that number if it was accidentally placed in a different location. 
  • Inaccurate counting: Logging inventory can be tedious, especially when done manually, leading to greater chances for mistakes. 
  • Administrative errors: At the back end of your retail operations, accurate inventory records and other paperwork can mean the difference between faulty or successful business endeavors. 
  • Damages: You can also lose inventory due to simple damages, such as from loading and unloading pallets incorrectly or experiencing issues with items on store shelves. Even small losses can catch up to you as larger problems later on, especially if these damages go unrecorded. 

Impacts of Inventory Shrinkage

Losing inventory can negatively impact your business in a variety of ways. You may notice these effects before you’re aware of lost inventory, which is why attention and prevention are crucial to your company’s success. Some of the most significant shrinkage-related setbacks include: 

  • Profit loss: When you lose inventory, you lose items you could have sold for profit or returned to the vendor. If you lose a lot of items, your losses may even cut into the inventory’s initial costs. 
  • Increased additional expenses: Major shrinkage issues may prompt your business to take measures such as hiring extra security or investing in excessive technology, all of which can ramp up your company’s operating costs, potentially raising retail prices for consumers as well. While preventive measures are practical, look for an all-encompassing software solution to meet all your inventory needs without unnecessary costs. 

While inventory shrinkage isn’t completely avoidable, it is manageable with the right preventive measures. The first step toward combating your business’s shrinkage is identifying how much inventory you’ve lost.

Calculating Inventory Shrinkage

Inventory is recorded using the dollar value of the products you’re storing. When you add new items to your inventory, you add their dollar amount to your inventory total. When you sell items from your inventory, you subtract their dollar amount from your total. A small amount of shrinkage is normal and expected. However, high numbers could indicate underlying issues. 

To calculate inventory shrinkage, first, make a count of your physical inventory. Then subtract your physical inventory cost number from the recorded inventory cost number. The difference is the shrinkage amount:

Recorded Inventory Cost – Physical Inventory Cost = Inventory Shrinkage Value 

To determine the percentage of inventory you’ve lost, divide the inventory shrinkage value by the recorded inventory cost, then multiply that number by 100

Many U.S. retailers’ inventory shrinkage rates rose above 3% in 2020, showcasing the widespread issue of inventory loss. Since inventory shrinkage can produce a variety of consequences, your business should do its best to protect its items and prevent continued loss. 

How to Prevent Inventory Shrinkage in Retail

Inventory shrinkage has consequences, but it is preventable. To help your business stay on top of inventory changes and create a more secure product environment, consider the following tips: 

  • Train your employees: Shoplifting can go unnoticed if employees can’t recognize when it’s happening. Knowledgeable workers will have a better idea of what shoplifting looks like and how to handle a theft situation. In addition, talking to your employees about the consequences of fraud will lower the chances of your workers stealing items themselves. 
  • Train administrative staff: To prevent documentation errors, make sure your administrative workers know how to correctly process, proofread and file all business information. 
  • Perform regular audits: Audits are examinations and evaluations of financial statements. The purpose of an audit is to ensure all your financial records are accurate and say what they claim to say. Audit at least once a year, if not more often, to keep up with important changes and catch inventory discrepancies as early as possible. 
  • Hire a double-checker: Simple human error can happen, even when you have all the right measures in place. Appoint someone to look over all paperwork before filing it to help catch administrative mistakes.
  • Regularly organize retail stores: When all items are in their correct places, it’s easier to identify missing inventory. Have your employees clean up after busy shopping days and regularly tidy up the shelves so you can keep track of what you have and what may be missing.
  • Pay particular attention to new shipments: To catch some vendor-related inventory issues at the very beginning, try to verify inventory amounts when you receive new products so you know right away about any discrepancies to address at other levels of the supply chain. 
  • Use an inventory management system: Technology-based inventory services can take your analog practices to the next level. Monitor your business’s inventory activity with efficient software designed to help you identify shrinkage, search for products, perform audits and more. You can also partner with a company that provides additional services, such as comprehensive barcode solutions, to help increase your inventory count accuracy.

Learn More About Finale Inventory Today

Inventory shrinkage prevents your business from reaching its full potential. Record new levels of success and improve your business across the board with inventory management systems from Finale Inventory. 

We want to help your business thrive. With our cloud-based software, you can reduce mistakes and keep accurate records, leading to increased security and efficiency. We’ll customize your inventory management system to fit your company’s unique needs, giving you technology you can count on during periods of company growth or change. 

Contact us today to learn more about what our software can do for you!