Wednesday, March 2, 2011

Retail 101: What is Shrink and How Does It Affect Me?

First a few definitions you need to know.

The definition of Shrink: refers to anything that can affect your bottom line and reduce, or "shrink" your profits.   Examples are, theft, paperwork mistakes, and product damages.  Bottom Line:  refers to the last line on the Profit and loss (P&L) Statement.  The actual net Profit.
P & L :   or Profit and loss statement is a bookkeeping document listing all sales then subtracts all expenses to give a total net Profit on the bottom line.

Loss Prevention Associate:  More than a Security guard this person is in charge of finding and preventing the loss of
profits due to shrink.  Some companies use the term asset protection or LP department.

Shrinkage of profits effect everyone.  Prices may go up to cover loses.  Too much and stores may report a loss and close. 

So what causes shrink?  Well there different types and thus different causes.  First you have to be organized.  Disorganization is the biggest causes of shrink!   You must keep good records and a neat store.  If you don't know what you had delivered and your stepping on merchandise in your back room, then  you won't have any idea of how much your losing.

 Mistakes on paperwork is called Paper shrink and can easily case a lose in profits. Here's just a few examples. 
  • You didn't check the count on delivery and you were shorted merchandise. 
  • The merchandise is marked incorrectly and selling for the wrong price.  This might make the customers happy, but not your bottom line.
  • A Mistake on your bills causing you to pay too much. 
 All these are examples of Paper shrink. 

Theft by both customer and employee makes up the rest of the shrink.  In another post I'll go more into how to control shrink and deter theft through loss prevention techniques.  But I needed to say if you are disorganize your employees and customers will take advantage of you.  I see this as more of a problem then you think.

A lot of companies refer to their shrink as being a percentage of sales.  Example would be that they want their shrink to be less than 2% of sales.   So the question is other than lowering the shrink itself can you lower your percentage.  The answer is yes, RAISE SALES.  Raising sales and keeping your shrink dollars the same will lower your shrink to sales percentage.  

So how do you know how much money you lost to shrink?  Do a yearly inventory.  If you keep good records you should know how much merchandise is in your store. If you don't you need to take a beginning inventory and keep better records from today on.  Any shortage since your last inventory is called shrink! 

Starting Inventory + Merchandised Received - Sales = On Hand Inventory

On Hand Inventory - Ending Inventory = Total Shrink Dollars

Shrink Dollars / Sales = Shrink Percentage

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