Inventory shrinkage

Inventory shrinkage refers to the loss of inventory due to factors such as theft, errors in inventory counting, damage, or loss. It can also include losses due to fraud, such as employees stealing from the company. Inventory shrinkage can have a significant impact on a business's bottom line, as it can represent a significant loss of revenue. To prevent inventory shrinkage, companies often implement measures such as regular inventory audits, security cameras, and employee training programs.

Inventory shrinkage formula

The formula for inventory shrinkage is:

Inventory Shrinkage = (Beginning Inventory + Purchases - Ending Inventory) - Sales

• Beginning Inventory: The amount of inventory on hand at the start of a given period.
• Purchases: The amount of inventory purchased during a given period.
• Ending Inventory: The amount of inventory on hand at the end of a given period.
• Sales: The amount of inventory sold during a given period.

So, the formula calculates the difference between what a company should have in inventory based on its records (Beginning Inventory + Purchases) and what it actually has (Ending Inventory) and subtracts sales to find out the shrinkage.

For example, if a company had $10,000 in beginning inventory, made $5,000 in purchases, had $8,000 in ending inventory, and made $9,000 in sales, the shrinkage would be calculated as:

($10,000 + $5,000) - ($8,000) - $9,000 = $7,000

This means that the company lost $7,000 in inventory due to shrinkage during the period in question.

Preventing inventory shrinkage

Measures to prevent inventory shrinkage include:

• Regular inventory audits: This involves physically counting the inventory and comparing it to the records to ensure accuracy. This can help identify discrepancies and pinpoint areas of loss.
• Security cameras: Installing security cameras in areas where inventory is stored can deter theft and make it easier to identify perpetrators.
• Employee training programs: Educating employees on the importance of inventory accuracy and the consequences of theft can help reduce shrinkage.
• Implementing inventory management software and RFID technology: This can help to automate the inventory process and provide real-time data on inventory levels, location, and movement.
• Establishing clear policies and procedures: This includes clear policies around the handling, storage and movement of inventory, as well as procedures for reporting discrepancies.
• Conducting background checks: This can help to identify and prevent potential fraud or theft by employees.
• Conduct regular physical audits of high-value, high-risk, and fast-moving items.
• Implement a "buddy system" for employees checking out inventory.
• Implement an incident reporting system for any discrepancies or suspicious activities.
• Use Inventory locking and tagging system for high-value items

Implementing these measures can help prevent inventory shrinkage and protect a business's bottom line.

Inventory shrinkage — recommended articles

Recordkeeping system — Stock register — COSHH assessment — Cybersecurity risk management — Fidelity guarantee — Privacy and security — Inventory adjustments — Bin card — Accounting error

References

• Fan, T. J., Chang, X. Y., Gu, C. H., Yi, J. J., & Deng, S. (2014). Benefits of RFID technology for reducing inventory shrinkage. International Journal of Production Economics, 147, 659-665.
• Howell, S. D., & Proudlove, N. C. (2007). A statistical investigation of inventory shrinkage in a large retail chain. International Review of Retail, Distribution and Consumer Research, 17(2), 101-120.
• Brown, T. S., Jones, J. W., Terris, W., & Steffy, B. D. (1987). The impact of pre-employment integrity testing on employee turnover and inventory shrinkage losses. Journal of Business and Psychology, 2(2), 136-149.