How to Prevent Shrinkage and Increase Your Profit
Have you recently completed your physical inventory count and come up short (again)? Are you concerned that this is a continuing problem? If so, then it is time to get serious about changing procedures at your store.
Shrinkage occurs at any point where merchandise and people come in contact. Studies have shown that 47% of all shrinkage is due to employee theft. This can be as blatant as employees walking out with merchandise, accepting returns of previously stolen merchandise, etc. The list goes on and on. Recordkeeping errors also cause "paper" shrinkage. Even a store's best customers are not immune to the temptation of taking something without paying for it.
A survey done by the National Retail Security Survey reports that the breakdown of shrinkage causes are:
- 47% employee theft
- 32% shoplifting
- 14% administrative error
- 4% vendor fraud
- 3% unknown
Store owners must always be vigilant to protect their business and their profit. The number one reason theft of any kind takes place is that the thief expects to get away with stealing. Sometimes there may be extenuating circumstances, such as a job loss, death, etc., but police consistently report that thefts take place because the perpetrator does not expect to get caught.
Remember, some situations are more conducive to theft than others. The opportunity to commit fraud is more convenient when people have access to financial accounts, when no one audits them, and when they think it is unlikely they will be caught or prosecuted or punished. Fraud is easier when companies have poor internal accounting controls or when they fail to follow them. Occasionally, fraud is so convenient that even honest people are seduced by the opportunity presented to them even though they had no intention of being dishonest.
Following is a list of suggestions to reduce shrinkage and increase the accuracy of your inventory records.
- Make honesty a high priority in your store. Tell your employees that theft of any kind will not be tolerated. Provide your employees with a list of what you consider theft and include such items as taking merchandise and giving unauthorized discounts to friends or family members. Also include taking long breaks, taking store supplies home for personal use, using computers to play games, etc.
- If you do catch an employee stealing, terminate the employee immediately and file a police report. Let your employees know that this is the procedure and you will follow it.
- When hiring a new employee, check references. Not just friends and co-workers but supervisors, if possible. If you can, invest in threat assessment testing and/or integrity testing and screen for potential criminals before you hire.
- Check up on your employees. For example, show up unannounced and close for those employees scheduled to close or show up early and open for those employees. They will appreciate your thoughtfulness to them and you can verify their honesty.
- Educate employees on what to look for so they can detect shoplifters.
- Make sure there are no blind areas in the store that make it easy for shoplifters to conceal items.
- Do not have best friends open or close together; if one is inclined to steal, the other may not report the theft.
- Allow for anonymous reporting of employee theft. Then, carefully check out each report before making any accusation.
- Never have just 1 employee open or close the store.
- If you have invested in theft prevention software or hardware, USE IT! No one benefits from a financial outlay that stays in the box or is never made completely operational.
- Stress accuracy to your employees whether they are completing a sales ticket, checking in merchandise, or discarding trash.
- If the store has a full-time cashier, all POS terminals should be read and cleared by someone other than the cashier.
- Both refunds and voids should be tracked by individual employees. You should look for patterns or excessive use of either.
- Each person should have his or her own identification and no one should EVER be allowed to use another employee's identification number.
- There must be a set procedure for handling and processing returned merchandise. The owner or manager should approve all returns and those returns should be tracked by sales person as well as by customer if at all possible.
- The cash register/store check out should be near the front of the store so that each customer can be observed as they pass from the store.
- If your store uses theft prevention systems and an alarm sounds, it goes without saying the alarm needs to be checked out and verified, even when the store is busy. Why did you pay for the theft prevention system in the first place?
Here is some food for thought
If your Net Profit is 5% of sales, it takes an additional $20 of sales to make up for each $1 of shrinkage. If shrinkage is $1,000 it will take an additional $20,000 in sales. It is just good business sense to initiate action to reduce your shrinkage figure as much as possible. For small independent retailers that provide good personal service, shrinkage should be no more than 0.50% to 0.75% of sales. If your store is in a mall, the shrinkage is likely to be a little higher, perhaps as much as 1.50% of sales. If your shrinkage was more than this, you have a problem that you need to attend to now so the next physical inventory count will be much better!