Edge Retail Academy Blog

Reducing Shrinkage through Physical Inventory

By William Wagner & Sherry Smith

Please raise your hand if you’ve ever been shocked by your shrinkage number!

As a retailer, doing inventory is at the top of the list as one of our least favorite things to do, not to mention, as a small business owner your plate is already overflowing. Nonetheless, there are several reasons small businesses need to take a physical inventory including but not limited to, the IRS requirements, identifying shrinkage, and to adjust the book value of your inventory to actual.

How often one should take inventory is a common question. The IRS requires an annual inventory, however, The Edge Retail Academy believes that twice a year, along with case counts or cycle counting is best practice, especially if shrinkage, defined as the value of missing inventory, is a concern. Surveys conducted by the National Retail Federation estimate the annual percentages of retail shrinkage between 1.41-1.51%, and an estimated loss $34 billion – $43 billion, respectively. A few more interesting facts to consider: employee theft was responsible for approximately 44% of all shrinkage, shoplifting accounted for approximately 32.6% and administrative error accounted for almost 13%. Monitoring your shrinkage can make the difference between profit and loss.

Cycle counts is a process of counting merchandise on a continuous basis without disrupting store hours. Employees can perform these counts by cases, category and/or vendor throughout the business year, before and after business hours. We highly encourage case counts be done daily, or at the very least weekly.

The best time to take a full, physical inventory would be at the end of your fiscal year. Your inventory process should be clearly outlined and your employees should be fully aware of the process. The more organized this process, the more quickly, efficiently, and accurately the physical inventory can be completed, eliminating entirely the need to close during normal operational hours.

Keep in mind that managing your inventory is an everyday event. Procedures and processes should be readily available to your team and should be done more often, not less frequently. The upside keeps you IRS compliant, works to your advantage when paying income taxes by avoiding overstating your ending inventory level and understating your cost of goods, potentially minimizing your income tax, and can dramatically minimize shrinkage.

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