How to Avoid Inventory Shrinkage


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

Inventory shrinkage refers to a loss of merchandise due to damage and spoilage, theft, administrative mistakes, and faults in articles taken from the industrial site to the end consumer. It is often referred to as a strike to the loss or margin of profit.

Where do you get the information to monitor inventory shrinkage? Bookkeeping provides all of the necessary and relevant information from which all of your accounts are formulated. Bookkeeping is a recognized and well-defined process in business and accounting.

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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., counterfeit coupons, petty theft, breaking, shoplifting

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

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How to Avoid Inventory Shrinkage

To decrease inventory shrinkage in your business, you will have to increase your control and security in each sector involving merchandise.

  1. Constrict security by putting up cameras in the customer and employee areas, including break and stock rooms. If need be, change the locks in the stockroom areas. Allow only the higher-level employees to access the excess stock.
  2. Bolt the back doors. If theft in the area is high, hire a security provider to watch your store. Ensure that at least one of your employees is always present on the sales floor. For retail stores, train employees to greet customers verbally so that any prospective shoplifter knows they’ve been recognized and seen in the store.
  3. Elect certain specific employees to accept, open, and distribute new shipments. The items 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 booked as received right before it is placed away. Ensure that the associates sign off on the packing list 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 filing. Organize the paperwork in a file cabinet, scan copies, and duplicate the forms on a computer. Make sure that you have a backup copy.
  5. Review each day’s transactions in the presence of your associates for accuracy. Check for repetitive and suspicious transactions. Instances can happen when an employee regularly cancels cash transactions. Provide employees with their password so they can use the cash register. In case of theft, you will know which employee committed the crime.
  6. Calculate the physical inventory you need in your business. Make a habit of doing this at least every year to keep track of the actual numbers you should have in your possession.

Complete Controller. America’s Bookkeeping Experts

Businesses must implement rigorous control measures and security protocols to combat inventory shrinkage. By enhancing surveillance, enforcing strict inventory procedures, and fostering a culture of accountability among employees, businesses can mitigate the risk of losses due to theft and administrative errors. Regular audits and diligent monitoring of inventory transactions are essential for maintaining accurate records and identifying potential discrepancies promptly. Through proactive measures and vigilant oversight, businesses can minimize inventory shrinkage and safeguard profitability.

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