Posted: 26 February 2015

Stock shrinkage is a big cost!

Millions of dollars are lost every year through stock shrinkage in retail and many other types of businesses. Shrinkage is a very expensive loss. Shrinkage occurs whenever the business fails to sell an item at its full price. The difference between the selling price of a product and the actual selling price is shrinkage. Accountants can effectively recover their fees by proactively advising clients on shrinkage reduction strategies.

Shrinkage can be caused by:

damage;
theft by an employee;
theft by a customer;
errors in recording label numbers;
not adequately checking goods when they’re received into the business;
poor handling techniques;
dropping stock;
leaving perishable products out of refrigeration;
over-ordering products, thus having products that need to be discounted to sell; and
stock going out of date – this can be caused by poor stock rotation.

Management needs to ensure staff are aware of the requirements to reduce shrinkage, to protect the business’ profits. Major areas of shrinkage on which staff could be concentrating include:

inadequately checking goods received from suppliers;
dishonesty by customers and staff;
careless handling of stock;
not rotating stock properly; and
not returning stock to refrigeration or chillers fast enough.

The review of a client’s stock management system is an appropriate activity for an accountant to undertake, in an attempt to firstly identify the amount of money being lost by stock shrinkage and then to determine policies and strategies to try and reduce the cost of shrinkage. This is one of the many activities accountants could embrace, as part of their ongoing strategy to contribute to a client’s value-adding and to offset the reduction of income that will occur through changes in compliance requirements with the Australian Taxation Office.

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