What Is Inventory Shrinkage? #
Shrinkage means you lose inventory without selling it. Money is going out, but nothing is coming back in. Shrinkage is bad for profit and can cause order delays.
Let’s look at the main reasons shrinkage happens.
1. Theft (Internal and External)
Unfortunately, theft is one of the biggest contributors to shrinkage. It can happen in two ways:
- Employee Theft: Occasionally, staff members might remove items without making a payment. These could range from minor office supplies to more significant, valuable stock. Additionally, some employees may alter sales records to conceal their theft.
- Customer Theft (Shoplifting): Shoppers might pilfer goods by concealing them in bags, pockets, or garments. Occasionally, they collaborate in teams to divert employees’ attention while removing merchandise. Retailers frequently invest in surveillance cameras and theft-prevention tools to minimize these losses.
2. Mistakes in Record Keeping
Errors in tracking inventory can cause shrinkage. This can happen in different ways:
- Data Entry Errors: If an incorrect number of units is entered into the system, the documented stock quantity will not align with the real inventory.
- Counting Mistakes: During stock checks, employees might miscount items, leading to incorrect records.
- Incorrect Price Scanning: If cashiers scan products incorrectly at checkout, they can create inaccurate inventory records.
- Misplaced Items: Sometimes, products are stored in the wrong location, making it seem like they are missing when they are just misplaced.
3. Broken or Damaged Items
Shrinkage can also happen when products are damaged before they are sold. Some common causes include:
- Shipping Damage: Items might get broken while being transported from suppliers to the business.
- Handling Damage: Employees or customers may accidentally drop, crush, or mishandle products, causing them to break.
- Storage Damage: If you store items improperly—like keeping food at the wrong temperature or stacking fragile goods incorrectly—you can make them unsellable.
4. Dishonest Suppliers
Not all vendors are honest, and some might try to take advantage of businesses. This can happen in different ways:
- Short Deliveries: A vendor could invoice for 50 items but only supply 45. Without proper inspection of the delivery, the company ends up paying for goods not received.
- Low-Quality Goods: Sometimes, suppliers send defective or expired products, making them unsellable.
- Price Manipulation: A vendor may charge a higher price than what was agreed upon, leading to financial losses.
5. Fake Returns and Refund Fraud
Some customers exploit return policies to get money back fraudulently. Common tricks include:
- Returning Used or Broken Items: A customer might purchase a product, utilize it, and subsequently return it as though it were unused. Some even exchange new items for damaged ones before returning.
- Returning Stolen Goods: Some people steal items and then try to return them to get cash or store credit.
- Using Fake Receipts: Fraudsters sometimes create fake receipts to return products they never actually bought.
How Can You Spot Shrinkage? #
- Do a physical count of your stock often. Compare it to your records.
- Use good inventory software that tracks stock in real time.
- Watch each SKU (stock keeping unit). This means checking every item one by one.
- Look at your sales and spending. If the math doesn’t add up, you may be facing shrinkage.
Why You Should Fix Shrinkage Fast #
- You keep more profit.
- Your stock numbers are correct.
- You save time by avoiding mistakes.
- Customers get their orders on time.
Steps to Reduce Shrinkage #
- Count Often: Do regular and random stock checks. This keeps employees honest and helps catch mistakes fast.
- Use Good Software: Pick a system that updates stocks live. Look for features like alerts, stock level reports, and barcode scanning.
- Train Your Staff: Make sure your team knows how to manage stock. Teach them how to spot suspicious activity and reduce waste.
- Add Safety Measures: Use simple tools like locks, cameras, or even mirrors. Keep your workplace secure and have clear ground rules.
- Choose Trusted Suppliers: Build good relationships with honest vendors. Always confirm deliveries and create written agreements.
- Set a Clear Return Policy: Make sure your staff knows how to handle returns to avoid fraud.
What Is Inventory Management? #
Inventory means anything you sell or use to run your business. It can be items on shelves, in storage, or your delivery van. Inventory management is how you keep track of these items.
You check what you have, what you need to buy, and what you have sold. Doing this well helps you serve customers better and keep your business running without waste.
Why Is Inventory Management Important? #
For small businesses in India, managing inventory the right way can lead to significant improvements. Here’s why:
You Save Money
Bad stock control can lead to two significant issues:
- You run out of stock. This means lost sales.
- You buy too much stock. This locks up money and can lead to waste.
Good inventory management helps you order the right items at the right time in the right amount.
You Keep Customers Happy
If a customer wants to buy something and you don’t have it, they might go to another store. But if your stock is up to date, customers will get what they need, and they’ll come back again.
You Save Time
Checking stock every day takes time. Good inventory tracking tools can help you do this fast. This gives you more time to grow your business.
Common Problems with Inventory Management #
Most businesses face the same problems when trying to control inventory. Let’s look at them and how to fix each one.
- People Don’t Like Change: Talk to your team. Explain why the new process helps and train them well.
- Starting is too expensive: Choose tools that scale with you. Some apps, like Vyapar, offer plans that fit small businesses.
- Wrong Data Entry: Use automation tools. They reduce manual work and lower human mistakes.
- Theft and Cheating: Create a trusted environment. Have clear rules, cameras, and checks. This builds trust and responsibility.
Tips to Manage Inventory Like a Pro #
Want to make your business easier to run? Follow these best practices:
- Use Technology: From barcodes to inventory apps, tech tools make tracking easy. Tools like RFID (radio tags) help you know where your goods are.
- Train Regularly: Make sure your team knows how to use technology and follow best practices.
- Study the Market: Know what’s hot and what’s not. This helps you buy what sells and skip what doesn’t.
- Start a Loss Prevention Plan: Build a plan to stop theft and stock loss. Use a mix of tech, training, and planning.
How Vyapar App Helps #
You may be asking, “What tool should I use?” Vyapar app is a great option. They designed it just for small Indian businesses.
Here’s how it helps:
- Real-Time Tracking: You always know what’s in stock and what’s not. This avoids running out or overstocking.
- Easy Reports: You get clear reports showing top-selling items or slow movers. This helps you plan better.
- POS Integration: Connect your sales machine (POS) directly to the system. Sales update your stock instantly.
- Easy to Use: No need to be a tech expert. Vyapar app allows anyone to use it with little training.
- Keeps Data Safe: Your information is secure and private. No one can access your data without permission.
FAQ’s: #
What is inventory shrinkage?
Inventory shrinkage is the loss of stock because of theft, damage, record-keeping errors, or supplier fraud.
How do I calculate shrinkage?
Shrinkage (%) = [(Recorded Inventory – Actual Inventory) ÷ Recorded Inventory] × 100.
What is the biggest cause of shrinkage?
Theft (both employee and customer theft) is the most common cause of shrinkage.
How often should I check my inventory?
Conduct regular stock audits at least monthly, and perform random checks in between.
Can inventory software help reduce shrinkage?
Yes, inventory management systems track stock in real time, detect discrepancies, and prevent losses.
Conclusion #
Inventory shrinkage has a direct impact on a company’s profitability and operational efficiency. By pinpointing the causes and adopting preventive strategies such as frequent audits, enhanced security, employee training, and inventory management software, businesses can reduce losses and enhance operations. Prompt action ensures precise stock levels, improved financial stability, and seamless customer service.