Sunday, May 8, 2016

Shrink 102: Why You Need To Take A Physical Inventory

Taking a complete physical inventory of your retail assets is a must.

Taking inventory is the process of counting all the merchandise to see the total value available for sale.

If you keep good records, you should know how much inventory is supposed to be on hand at any one time.   Buy merchandise, you add it to your inventory.  Sell merchandise and you  subtract it from inventory. 

So why take an Inventory?

Taking an actual physical inventory of all the goods in your shop will tell you if anything is missing.  If you have more merchandise than you expect to have you have a surplus.  If you have less merchandise you have a shrink.

Shrink means that your on hand inventory is less than you expect it to be.  It shrunk!  So what causes it to shrink?

  • Bad record keeping counts for a large amount of shrink in small retail stores.  How can you expect to know exactly how much merchandise you have on hand if you don't keep good records.

  • Honest mistakes can cause shrink.  Always double check what you received equals what you paid for it.  Make sure your pricing the items correctly. 

  • Damages can cause shrink too.  Many employees just throw out damaged merchandise.  Keeping records of your damages can be more helpful than just keeping tabs on your inventory.  By keeping a list of damages you know, what is getting damaged, what's coming in damaged, when damages might be happening.  Not keep records it just goes in to one category of missing merchandise or shrink.  Plus, there are ways to get some money out of damages, so they are not a complete loss.

  • Theft is the main cause of shrinkage of inventory. 
    • Known theft, those empty packages you find.  Keeping track of those empty packages helps you know where problem are between physical inventories.
    • Unknown theft usually counts for the largest portion of shrink, both internal (employee) and external (customer).
Here are some examples of how simple mistakes can cause shrink on you inventory. 
  1. Fred owns a small card, candy and gift shop.  A few days a week his daughter works the closing shift after school.   He allows her to have a soda and snack on any open candy as a perk to the job.  Being young she doesn't think it's a problem to open a bag of candy when damaged bags are not available.  The other employees see this and think its ok for them too.  Fred not being there during the closing shift doesn't know the employees are opening and eating the candy.  He thinks the customers are opening the candy.  Either way,  by not keeping track of the amount of candy the employees are eating, its assumed to be shrink when inventory is taken.  The big question is how much money is it costing you?  Do you want to allow this perk? If so keep track of it and list it in your books as an employee perk.  Or, it just gets mixed in one larger number of unknown shrink at inventory.
  2. Fred's wife come to the store and does her shopping right off the shelf.   If this merchandise is not recorded,  you will never know what was stolen or just taken for personal use.   Other employees even family members may see this and just think its ok to do same.  Without keeping records, you may never know.
  3. Fred ordered 48 pieces of wrapping paper for .50 cents each.  He usually sells it for $1.00 each.  Fred didn't open the box and count it before it went on the shelf.  If he did he would of know that only 36 pieces of wrapping paper came in.  The bill comes listed as 48 pieces.   Fred pays it thinking its correct.  His daughter mistakenly forgets to change the price in the marking gun and puts a sticker of .89 cents on them.    $48 in merchandise went into inventory(from the bill).   $32 worth of merchandise was sold (through the register), causing a $16 in shrink.


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