Shrinkage isn’t just the punch line of a Seinfeld episode. Shrinkage is a real problem for retailers around the globe. Here’s what shrinkage is, how it can affect your business and what to do about it.
What is 'Shrinkage'?
Investopedia defines shrinkage as the loss of inventory that can be attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage in transit or in store and cashier errors that benefit the customer.
How to Calculate Retail Shrinkage
Here’s an easy way to calculate shrinkage if your business has retail inventory. Simply divide the value of your physical inventory by the value of your suggested inventory, multiply by 100 and subtract this number from 100. The resulting number will help you find the percentage of shrinkage you are experiencing each time you count inventory. It’s important to compare these percentages over time to see if shrink is reducing or growing.
Impacts of Shrinkage
- Loss of Profits Lost inventory = lost revenue. Retail businesses operate on low margins and high volumes. That means retailers need to sell lots of product in order to make a profit. When items walk out the door, business owners can’t generate cash from those goods and have to eat the costs of acquiring and replacing the missing inventory.
- Company Culture If you suspect that shrinkage is due to employee theft, you’ll need to implement preventative measures. This might include cameras or, in extreme cases, bag searches. This can cause company moral to tank.
- Higher Prices Missing products directly and dramatically affect the bottom line. Those costs are often passed along to the consumer in the form of price increases. Higher prices can drive away even the most loyal customers.
- Distraction Are you dealing with shrinkage? The problem might be so severe that it takes up a lot of energy. That’s valuable time you could be spending on business growing initiatives.
Ways to Prevent Retail Shrinkage
- Communicate Speak with your employees about retail theft and how it impacts the business. This will raise awareness and serve as a deterrent to team members that might be stealing.
- Cameras Install cameras in employee areas like stock rooms and break rooms. Change doorknobs to locks on stockroom areas and only allow specific employees to access.
- Inventory Management: Software can help you track products so you know exactly what is being lost and how often. Capterra has thoroughly reviewed various inventory management systems here.
- Employee Training: Create a loss-prevention program so your employees can identify theft and know exactly how to report. Hold workshops periodically and invite a local law enforcement officer to address specific community issues.
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