What happens here is that a brand can’t sell a product that it does not actually have in the warehouse, which can lead to delayed orders and unsatisfied customers. Miscounts, damage, fraud, or theft can all lead to an inventory shrink. Cumulative inventory losses can have significant consequences.

  • To give you some perspective, the entire wine industry has a market value of 70.5 billion dollars.
  • If you’re currently using an inventory spreadsheet or a piece of paper to track inventory, keeping accurate inventory records can be a real challenge.
  • Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.
  • Still, organized or unorganized theft has remained a preoccupation of retailers and politicians, particularly on the right, where city and suburban crime is a potent political topic.

However, it may require a complete overhaul of your current inventory management processes. You’ll need to diagnose the problem before you solve it, so it’s important to approach the problem with care and deliberation. https://quick-bookkeeping.net/ However, due to shrinkage, your actual inventory value is $63,000. It can lead to a drop in profits and require you to alter your accounting books, which will cost you even more time and money to fix.

Oracle Interviews Supply Chain Influencer Mike Mortson on the Digital Supply Chain

At point of sale, stores can experience retail shrinkage from breakage and shoplifting. ECommerce businesses experience inventory shrinkage when items are damaged on warehouse shelves or disappear during shipping or receiving. Accounting for inventory shrinkage is crucial to growing your business. https://bookkeeping-reviews.com/ Without knowing where your products are going, you can lose out on profits, risk misrepresenting your value on accounting reports, and increase your cost of goods sold. On the employee theft side of things, conducting surprise audits can prevent employees who are stealing from being prepared.

  • As you can tell from the word choice, inventory shrinkage can’t be eradicated.
  • Create a new account that especially accommodates the losses that occurred due to shrinkage.
  • Brigitte also has a background in writing, research, and publishing, with an undergraduate degree in writing.
  • This one is pretty self-explanatory, but if perishable products aren’t used by their expiration date, they contribute to inventory shrinkage.

It helps you pinpoint where shrinkage may be happening and if you need to invest more in your loss prevention strategies. Good stock management practices will help you keep on top of inventory shrinkage, though, so implement frequent cycle counting practices instead. As such, an acceptable inventory shrinkage rate is as small as possible. When you correct those records, you might end up with shrinkage. Inventory shrinkage can take place when items, such as expired produce, are naturally no longer sellable.

What does shrinkage mean for retailers?

Like those at or above 3%, which account for almost 11% of retail businesses. Divide the difference by the amount of stock recorded in the accounting books to get the percentage of inventory shrinkage. This situation may https://kelleysbookkeeping.com/ result in stockouts, leaving the business unable to meet demand and risking the loss of customers to competitors. The financial impact of shrinkage may lead a business to increase prices, potentially alienating customers.

Automate Inventory and Reporting

Generally, the reasons for inventory shrinkage fall under four main categories. Limiting shrinkage is a vital part of inventory control, and it all comes down to being better organized as a business. Here’s what inventory shrinkage refers to and how to get it under control. As your ecommerce business grows and inventory becomes too expensive or challenging to manage in-house, consider using an expert ecommerce fulfillment company to help you. Even more importantly, calculating inventory shrinkage is key to minimizing it in the future, as an accurate calculation could give you a hint as to the shrinkage’s cause.

Product Damage or Error

Busy warehouse workers move it out of the way, unsure what to do with it. When someone discovers that products are missing, no one knows where they are. Explore a mentorship program if you have both experienced inventory workers and newer unskilled staff members. The latter can learn from their more experienced colleagues how to properly track and inventory items to reduce mistakes. Damage refers to anything that causes the inventory to become unsellable. This includes broken packaging, cracks, tears, water damage, product expiration, and more.

Management errors such as miscounting, wrong units of measurement used, or any other type of human error that was a mistake can lead to inventory shrinkage. This is even possible when automation is used for inventory management. Inventory shrinkage is when actual inventory levels are less than accounting has them recorded as. Usually this means something has gone wrong, either from an accounting error or theft. To combat significant inventory shrinkage, you must familiarize yourself with what it is, why it happens, and the preventative actions you can take. When it does happen, you need to understand how to make correcting entries in your books for proper inventory accounting.

An Example of Inventory Shrinkage

If you’re not keeping an eye on your inventory levels, you’re vulnerable to being blindsided by shrinkage rates that you never even knew were a problem. However, full physical inventory counts are prohibitively time consuming—there’s a reason most retailers only count their entire stock once or twice a year. Accounting for inventory shrinkage is critical for an ecommerce business.

Create an inventory shrinkage action plan

Inventory shrinkage is a term to describe the loss of inventory. The shrinkage could be the result of theft, breakage, poor recordkeeping, etc. Instruct employees on best practices to avoid spoilage, such as stocking new products behind those with upcoming expiration dates. Train your team on smart shelving practices and proper handling and storage to help curtail damaged goods.