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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. While it’s nearly impossible to eliminate shrinkage entirely, accountants and managers should keep track of shrinkage in an effort to manage it.
Store managers know the precise number of items they purchase for resale, and using the unit price and unit resale price, can easily figure the value of their goods at any point. That paper value doesn’t take into consideration the loss of inventory for various reasons. Shrinkage measures the difference in received value—the amount of stock a business plans on having on hand to sell—and the amount that’s actually sold. Shrinkage is most accurately calculated following a formal inventory of stock on hand and comparing it to the value of inventory on the books.
Inventory loss may be quantified beyond the raw dollars lost in stock value by calculating shrinkage. A business may calculate its shrinkage percent by dividing its shrinkage amount by its total sales. For example, a business that lost $5,000 in shrinkage and produced $100,000 in total sales would have a shrinkage percentage of 5 percent. Different industries will have different rates of shrinkage. Every manager should strive to reduce shrinkage as low as possible to maintain an acceptable profit margin.
Causes of Shrinkage
During 2001, shrinkage was responsible for a loss of more than $30 billion to retailers nationwide, according to the National Retail Security Survey. The most recent figures available, those for 2009, indicate that shrinkage rose as high as $36.5 billion for 2008 before settling back to $33.5 billion in 2009.
Four major areas contributed to inventory loss in 2001. Theft—by employees as well as shoplifters—was the leading cause. Employee theft accounted for 48.5 percent of shrinkage. Shoplifters were responsible for 31.7 percent. Administrative errors, such as errors in receiving processes or accounting errors, accounted for 15.3 percent of shrinkage, while vendor fraud, such as misrepresentation of shipments, caused 5.4 percent of inventory loss. The survey report noted that rounding of reported figures resulted in a total that exceeds 100 percent.
Deferring Inventory Loss
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. Restricting discounting at the cash register will prevent employees from improperly marking down items, while closely monitoring cash refunds prevents employees from disguising theft from their till as a refund.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.