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Understand and Mitigate Shrinkage

Inventory loss can affect any business, but the problem is more common in the retail sector. Recent figures show that shrink in retail results in up to $48.9 billion in losses. A common misconception is that businesses absorb shrinkage as an ordinary cost of doing business.

In reality, loss of inventory can easily become the downfall of your small business. This necessitates that you implement shrink prevention strategies that can help secure your bottom line. Read on to learn more about shrinkage and ways to reduce inventory loss.

Basics of Shrinkage 

Inventory shrinkage is an accounting discrepancy that arises when the amount of inventory indicated in the accounting records does not exist in the actual stock.

To determine the amount of shrink, calculate the cost of existing inventory and subtract this from the cost listed in the accounting records.

The percentage rate of inventory shrinkage is the difference divided by the inventory amount on the accounting records.

Sources of Shrinkage 

The first step toward mitigating shrinkage is identifying the sources of inventory loss in your business. 
The loss of inventory can occur in many ways, but the top sources of shrink include shoplifting, employee theft, administrative errors, and external crime.

Shoplifting is the leading cause of shrinkage, accounting for 36.5 percent of inventory loss, while employee fraud is responsible for up to 30 percent of shrink.

External crimes such as vendor loss and armed robberies account for about 5.4 percent. Administrative errors are becoming an increasingly significant source of shrinkage, accounting for a whopping 20 percent. 

Solutions for Shrinkage 

Completely eliminating shrinkage can be difficult. However, small business owners can take several steps to minimize the rate of shrinkage.

Electronic Article Surveillance
Regular security measures such as hidden cameras, security guards, or alarms are no longer effective at preventing and detecting shoplifting incidences. Consider installing electronic article surveillance technology if shoplifting is a problem at your premises.

Store Layout 
While technology can help you stay ahead of shoplifters, think about how your store layout could be contributing to shrinkage via shoplifting. Find ways to make aisles clear and the layout design functional to help employees monitor customers from various angles of the store.

Employee Turnover
Lax loss-prevention strategies can contribute to employee theft. However, low morale and high turnover can also encourage employees to steal and engage in fraudulent activities in an effort to get back at the company.

Show leadership, listen to your employees, and work together to find ways to allow the workers to feel recognized, valued, and accountable. Train employees on loss detection and prevention to empower them to mitigate shrinkage.

Employees will be less likely to steal or engage in fraudulent activities if they have a sense of ownership toward the business.

Inventory Management Modules 
An inventory management system consists of hardware and software that automates inventory tracking and sales. By streamlining the supply chain, an inventory management system can minimize shrinkage from administrative errors, vendor fraud, and employee dishonesty.

Cash Management Technology 
Shrinkage primarily results from loss of inventory. However, cash theft can also adversely affect the financial well-being of your business. Develop a policy that provides guidelines for cash management procedures and deters employees from poor cash handling practices. 

Backup your policy with solid cash management solutions such as digitized cash counters, safes, and drawers to minimize loss and facilitate effective cash and inventory reconciliation.

The most challenging aspect of shrinkage is that you may not notice the problem until it is too late. Implementing loss prevention, inventory, and cash management strategies can help you detect and mitigate shrinkage and get your business back on track.

Banker Money Counting Systems provides digitized cash management solutions. Call us today to learn more about our innovative cash counting systems suitable for all types of businesses.