Shrinkage (accounting)

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]. In Europe shrinkage was about 1.27% of sales and the same figure for Asia Pacific was 1.20% according to the Global Retail Theft Barometer 2008.[2].

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Causes of shrinkage

An estimated 44% of shrinkage in 2008 was due to employee theft, totaling over $15.9 billion. Another 35% was due to shoplifting, totaling over $12.7 billion.[1] The prevention of this type of shrinkage is one reason for security guards, cameras and security tags. Other causes of shrinkage include:

Loss at the POS terminal

Shrinkage in retail that is caused by employee actions typically occurs at the Point of sale (POS) terminal. There are different ways to manipulate a POS system, such as a cashier giving customers unauthorized discounts, creating fraudulent returns, manually entering values in the system or making a no-sale, which means that the cashier opens the cash counter without registering a sale. These transactions that differ from normal transactions are called POS exceptions. Traditionally POS fraud is fought by surveillance staff monitoring a POS terminal or by manually searching in surveillance video recordings. Modern POS systems can have automatic alerts when specific exceptions are detected. Also exception reports and listings based on employees, refunds, terminals etc are possible to detect with modern systems. Modern networked based POS systems can also include network video to POS exception listings, giving quick access to detailed information of what has happened.

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 x 100 = Shrinkage Percent

References

  1. ^ a b National Retail Security Survey (2009) University of Florida
  2. ^ Global Retail Theft Barometer 2008

See also