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Inventory shrinkage occurs in retail stores and businesses when the physical tally of the stock or merchandise contrasts from the tally that records specify should be there. Shrinkage can be due to a variety of factors occurring in combination or singly. These include theft, inefficient record keeping, misplaced stock, order fill errors, or shipping errors. Despite the fact that paper errors indicate a trace of inaccurate loss, robbery can be a real loss of inventory.

Inventory shrinkage refers to a loss of merchandises due to damage/spoilage, theft, administrative mistakes, and faults on articles taking from the industrial site to the end consumer. The shrinkage is often referred to as a strike to the loss or margin of profit.

Where do you get the information to keep a check on your inventory shrinkage? Bookkeeping will provide all of the necessary and relevant information from which all of your accounts are formulated. The process of bookkeeping is a recognized and well-defined process in the field of business and accounting.

Causes of Inventory Shrinkage

Inventory shrinkage is unavoidable. On the other hand, the pace can be measured through appropriate inventory management practices. Shrinkage can happen due to deceitful behaviors such as:

  1. Fake sales and employee theft  
  2. Retail theft i.e. fake coupons, petty theft, breaking and entering, shoplifting

Nevertheless, inventory shrinkage isn’t always accredited to a hurtful swindle. It could also be that there are below par defined operational standards and procedures which, in return, lead to complex administrative errors.  A trickle-down effect occurs in the entire business including financial and warehouse operations.

How to Avoid Inventory Shrinkage

In order to decrease inventory shrinkage in your business, you will have to increase your control and security in each sector that involves merchandise.

1. Constrict security by putting up cameras in the customer and employee areas, including break rooms and stock rooms. If need be, change the locks to the stockroom areas. Allow only the higher-level employees to have access to the excess stock.

2. Bolt the back doors. If needed, hire the services of a security provider to watch your store if theft in the area is high. Make sure that at least one of your employees is present on the sales floor at all times. For retail stores, train employees to greet customers verbally so that any prospective shoplifter is aware that they’ve been recognized and seen in the store.

3. Elect certain specific employees to accept, open, and distribute new shipments. The items present inside the shipment should be matched according to the order sheet, instead of the transporter’s packing list. The merchandise should be immediately registered into the store’s inventory system and be booked as received right before they are placed away. Ensure that the packing list is signed off by the associates once all of the items have been verified to be correct.

4. Verify that packing lists, purchase orders, shipping receipts, and invoices are accurate before they are filed. Organize the paperwork in a file cabinet, scan copies, and make duplicates of the forms in a computer. Make sure that you have a backup copy.

5. Review each day’s transactions in the presence of your associates for the purpose of accuracy. Check for repetitive and suspicious transactions. Instances can happen when an employee regularly cancels cash transactions. Provide employees with their own password in order to use the cash register. This way, in case of theft, you will know which employee committed the crime.

6. Calculate the physical inventory you need to have in your business. Make a habit to do this at least every year to keep a check on the actual numbers you should have in your possession.


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