In financial accounting the term inventory shrinkage (sometimes truncated to shrink) is the loss of products between point of manufacture or purchase from supplier and point of sale. The term shrink relates to the difference in the amount of margin or profit a retailer can obtain. If the amount of shrink is large, then profits go down which results in increased costs to the consumer to meet the needs of the retailer. The total shrink percentage of the retail industry in the United States was 1.52% of sales in 2008 according to the University of Florida's, National Retail Security Survey.[1]
An estimated 44% of shrinkage in that time period was due to employee theft, totaling over $15.9 billion. 35% of 2008 shrinkage was due to shoplifting, totaling over $12.7 billion.[2] The prevention of this type of shrinkage is one reason for security guards, cameras and security tags. Also, some shrinkage is due to damage in transit, administrative errors such as shipping errors, warehouse discrepancies, and misplaced goods, and vendor fraud. When dealing with perishable goods, such as produce, natural spoilage becomes a source of shrinkage.
In the United States, the National Retail Security Survey is published annually as part of the Security Research Project at the University of Florida. The Security Research Project endeavors to study various elements of workplace related crime and deviance with a special emphasis on the retail industry. Since theft is hidden, no study can be completely accurate. Employees are easier to monitor than customers, which may artificially inflate the percentage attributed to employee theft.
One effective measure to prevent against loss due to shrinkage is to implement an inventory management application offered by a third party vendor. These applications allow for better control over inventory and will alert companies of the source of the inventory shrinkage. A more accurate picture of inventory also provides significant cost savings for companies as costs associated with stock-outs or excess inventory are eliminated.
Calculating shrinkage figures can be accomplished through the following formulas:
Beginning Inventory + Purchases - (Sales + Adjustments) = Booked (Invoiced) Inventory
Booked Inventory - Physical Counted Inventory = Shrinkage
Shrinkage/Total Sales = Shrinkage Percent
References
- ^ National Retail Security Survey (2009) University of Florida
- ^ National Retail Security Survey (2009) University of Florida
See also
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