Table of Contents
- What Is Shrinkage?
- The Importance of Understanding Inventory Shrinkage
- How Does Shrinkage Affect Retail Profits?
- What Are the Causes of Shrinkage?
- How Do You Control Shrinkage?
- How Is Shrinkage Calculated in Retail?
- How Much Is Lost to Shrinkage Annually?
- What Are Retailers Prioritizing to Reduce Risk of Loss?
- The Bottom Line
What Is Shrinkage?
Let me explain shrinkage to you directly: it's the difference between what your records say you have in stock and what's actually there. In retail, this happens because of things like theft, mistakes in paperwork, or fraud from suppliers, and it eats into your profits. You need to grasp this if you're running a store, as managing it keeps your operations smooth and your bottom line healthy.
The Importance of Understanding Inventory Shrinkage
Shrinkage is straightforward—it's the gap between your book inventory, which tracks the dollar value of what should be on hand, and the physical inventory you can actually count. When you receive products, you record them as assets on your balance sheet. For instance, if you take in $1 million worth of goods, your inventory account goes up by that amount. Each sale reduces it by the cost and adds to revenue. But losses from various causes create that discrepancy. Say your books show $1 million, but a physical check reveals only $900,000— that's $100,000 in shrinkage right there.
How Does Shrinkage Affect Retail Profits?
The biggest hit from shrinkage is to your profits, and it's particularly tough in retail where margins are slim and you rely on high volume. If inventory vanishes, you can't sell or return it, so that loss directly cuts into your earnings. Many retailers bump up prices to cover these hits, which means customers end up paying more because of theft or inefficiencies. If prices get too high, price-sensitive shoppers might take their business elsewhere. On top of that, you might spend more on security like guards or tech, which either eats into profits or gets passed on in higher prices.
What Are the Causes of Shrinkage?
Shrinkage comes from inventory disappearing due to shoplifting, errors in administration, theft by employees, fraud by vendors, damaged goods, and other issues.
How Do You Control Shrinkage?
To keep shrinkage in check, you should run regular inventory audits, set up surveillance cameras, vet your vendors carefully, and train employees on preventing theft.
How Is Shrinkage Calculated in Retail?
Calculating shrinkage is simple: take your book inventory—the amount you recorded as received and expected to have—and subtract the actual physical inventory you count in the store.
How Much Is Lost to Shrinkage Annually?
From a National Retail Foundation study, retailers saw $62 billion in losses from shrinkage in 2019, which worked out to about 1.6% of their sales on average.
What Are Retailers Prioritizing to Reduce Risk of Loss?
Around 30% of retailers say ecommerce crime has jumped up their priority list in the last five years, with organized retail crime at 28% and internal theft at 20%.
The Bottom Line
Shrinkage is the inventory loss from theft, errors, and fraud, creating a mismatch between your records and reality that hurts profits and cash flow. You can handle it with audits, better security, and staff training. By staying on top of this, you'll protect your earnings, keep cash flowing steadily, and stay competitive.
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