How Much Money Can Be Lost by Inventory Shrink?
When it comes to inventory shrinkage, there are two indisputable facts. If you have a large inventory shrinkage, you will lose a lot of money. According to the Center for Retail Research, North American retailers lose up to $45 billion worth of money due to inventory shrinkage yearly. On the other hand, proper management of inventory shrinkage increases profits. This is why it’s important to manage and lower inventory shrinkage until it’s below average. This can be done by installing integrated security systems. Here’s an in-depth look at inventory shrinkage and how it can cause losses.
What is Inventory Shrinkage?
Inventory shrinkage refers to the difference between the available inventory and the inventory bought. In the majority of cases, the inventory available generally falls below the inventory that was bought. This causes huge losses. A lot of businesses lose billions of dollars due to inventory shrinkage each year. This has negative impacts on the profitability of businesses. The only way to reduce the amount of money lost to inventory shrinkage is to reduce the shrinkage. This can be achieved by installing integrated security systems. These reduce theft significantly.
How Much Money is Lost to Inventory Shrinkage
To find out how much money is lost to inventory shrinkage, you will need to conduct a physical count of all the items in your inventory. Once you have figured out how many items you have, you can then subtract them from the total inventory recorded in your books. Below is the general formula for calculating inventory shrinkage:
Inventory in Books – Inventory in Physical Stock = Inventory Shrinkage
You can also use another formula to calculate the inventory shrinkage rate. For this, you will have to divide the inventory shrinkage, but the inventory bought.
What Accounts Are Affected When There Is Inventory Shrinkage?
It’s very important to record losses caused by inventory shrinkage. These losses have to be placed in the right account when doing bookkeeping. If the loss you encountered is small, it should be debited in the cost of goods sold. On the other hand, if you encounter significant losses, you will need to have a specific amount and create a new account that indicates the losses caused by inventory shrinkage.
Inventory shrinkage is a serious problem that can significantly impact a company’s profitability. It’s important to understand how inventory shrinkage works and how to avoid it. Are you having problems with inventory shrinkage? Get in touch with us today. We provide integrated security systems to minimize inventory shrinkage in your business.