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]
Causes
According to the 2008 National Retail Security Survey conducted at the University of Florida shrinkage rate of 1.51% translates into $36.3 billion in annual loss ($15.5 billion to employee theft and $12.9 billion to shoplifters). Theft continues to be the driving force behind retail inventory shrinkage, at 78.3% of all shrink in 2008. Of that portion, 42.7% is attributed to employee theft and 35.6% was due to shoplifting.
The prevention of this type of shrinkage is one reason for security guards, cameras and security tags. Other causes of shrinkage include:
- Administrative errors such as shipping errors, warehouse discrepancies, and misplaced goods.
- Cashier or price-check errors in the customer's favour.
- Damage in transit or in the store.
- Paperwork errors.
- Perishable goods not sold within their shelf life.
- Vendor fraud.
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.
Retailers may choose to implement an inventory management solution offered by a third party vendor. These systems often allow for better control over inventory and will alert companies of the source of the inventory shrinkage. A more accurate account of inventory provides significant cost savings. With successful analysis, costs associated with stock-outs or excess inventory can be reduced.
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
See also
- Breakage, used for items which remain in inventory, but go unsold
- Acceptable loss
- Loss prevention
- Surplus value, alternative interpretation of value and products