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Are Your Profits Walking Out The Door?

What has been your store's shrinkage experience for the last two years?  If it has not been as good as it should have been, now is the time to analyze the possible causes and take steps to keep shrinkage in line this year.

The difference between the perpetual book inventory and the physical inventory count is called shrinkage.  The book inventory is a record of what ought to be on hand in view of what has been received, what has been sold and price changes.  Physical inventory count is the amount and value of all the goods actually on hand.

Shortages can and will occur at every point where merchandise changes hands or paperwork is created or processed.  Proper systems with built-in controls must be put in place to eliminate or reduce these shortages.  While there is not  enough room to list all the specific causes of shrinkage, we will give several examples of each of the three general causes: paperwork errors, internal theft and shoplifting.

Paperwork errors can happen almost anywhere in the merchandising cycle.  For example: 

  • Marking goods at a price lower than the retail price recorded on the receiving record.
  • Failure to record all markdowns.
  • Miscounting physical inventory. 
  • Clerical errors causing the book inventory to be higher than it should be. 
  • Timing is of particular importance.  When comparing the actual physical inventory count to the perpetual book inventory, care must be taken to ensure that every invoice representing goods that have been received before the physical inventory count is included in the calculation of book inventory.

While internal theft can be anything from taking merchandise to taking cash or store supplies, we will focus on those instances of internal theft that pertain to merchandise.  Some examples are:      

  • Writing up a cash sales slip for merchandise but destroying the ticket after the customer leaves and pocketing the cash.      
  • Recording a false cash refund and pocketing the cash.
  • Taking merchandise without paying for it.
  • Extending unauthorized discounts or credit card refunds for friends.

Shoplifting can occur at any time.  Anyone can be a shoplifter; a regular customer who never intended to steal but gave in to temptation and opportunity, or a seasoned professional.    

Although shortages are normally expected, it is not logical to have counted in the physical inventory more than the book figure indicates.  Goods are stolen, but not donated to the store.  Therefore, overages are due largely to errors in record keeping, although they may be due to an employee trying to cover up the theft of merchandise.  Some examples are:

  • Recording markdowns without actually reducing prices on price tickets.
  • Overstating the physical inventory.
  • Including in the physical inventory count merchandise that has not yet been recorded in the book inventory.

There are several factors that affect the reduction of shrinkage.

  • Whether or not you have a stated shrinkage goal to work towards.
  • Top management's commitment to reduce shrinkage.  If top management gives shrinkage control top priority, it will invariably be reduced.
  • Whether or not proper procedures that contain built-in internal controls have been set up for each transaction or event in the flow of merchandise from the time it is ordered until it is purchased by your customer.  And whether or not these procedures are being followed.
  • The record keeping system being used.  If you are controlling your inventory at the classification or category level, the Retail Inventory Method can help keep losses down.  The fact is that shrinkage declines when it is measured, and the Retail Inventory Method generally provides the best measurement of shrinkage.

Paperwork errors can be controlled by use of a good, well-documented system containing built-in checks and balances.  This is an area in which we have helped many retailers by conducting internal security checks and developing written procedure manuals.  But a good system is not enough.  All employees (receiving clerk, salespeople, buyers, office personnel) must be properly trained.  They must be told the importance of following the proper procedures.  And, of course, management must follow up to see that the proper procedures are being followed.

The retail store by its very nature presents many day to day temptations to employees who handle the merchandise and money of the company.  It is the responsibility of management to remove as many temptations as possible thereby helping to keep employees honest.  This is done by setting up procedures containing good internal controls and by seeing that these procedures are followed without exception.  For example:

  • Require management approval on all refunds and credits.
  • All employee purchases should be rung up and checked by the owner, manager or another designated person.
  • Keep strict control over refund authorization slips, sales tickets, gift certificates or any other types of forms which can be used by an employee to obtain cash or goods. 
  • Know your employees.  When hiring new employees make an effort to hire honest employees.  This can be done  through interviewing techniques, by carefully checking references and by the use of carefully developed written honesty tests.

How your merchandise is displayed can have an impact on shoplifting.  For example:

  • Keep small, expensive items behind a counter.
  • Keep your store neat and uncluttered.  Neat displays make it easier for alert salespeople to spot missing merchandise.  
  • Do not have blind spots on the sales floor.  Try to avoid counters that are exceptionally high.

Until management gains an accurate understanding about employee theft and initiates sound loss prevention measures, it will remain a major drain of profits, productivity and employee morale. Minimally, the following steps should be taken:

Conduct a survey or audit of your business. Identify possible existing theft and potential opportunities to exposure to these risks.   To help independent retailers in this task we have developed a comprehensive "Internal Control Manual" that leads you, step by step with questions through all aspects of your business.  If you are interested, just go to our web site and click on the tab that says "Keep Your Staff Honest".

Educate supervision and the general employee population as to the impact employee theft has on them and how they, not just management, are the key to solving the problem.

While the above can act as a deterrent, well-trained and attentive sales personnel are your best defense against shoplifting.. Alert, courteous salespeople can deter many would-be shoplifters by their presence.  Make sure they are properly trained so they can spot suspicious behavior and know what to do if they see someone taking merchandise.  Your local police department may have information concerning this or may be willing to present a seminar on the prevention and detection of shoplifting.

There is no one shrinkage solution for all retailers since every retail store is unique.  Solid accounting procedures and systems must be developed specifically for your store and scrupulously followed at ALL levels.  Employees must be properly trained to follow correct procedures.  Management must follow up to see that procedures are being followed.  In other words, good management will help reduce the temptation and conditions favorable for dishonesty and theft and reduce your shrinkage losses.

Shrinkage is a variable and controllable expense.  Management's attitude toward and tolerance level for shrinkage is the controlling factor.

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Allen, TX 75002


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