Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Stocks can be difficult to track. If you don't have good inventory handling, it's hard to tell when items are missing. Worse, you'll find out about the issue when it's already impossible to retrieve the missing stock. As a result, you're experiencing an inventory shrinkage in your business.
Inventory shrinkage is not about stocks shrinking literally. Instead, it means a huge amount of inventory listed on the accounting records doesn't exist within the actual inventory. Certain stocks go missing for various reasons, from miscounting to supplier fraud.
Inventory shrinkage is a common problem for businesses of all industries and sizes. No matter how careful you may be, it's bound to happen at some point. Nevertheless, there are ways to prevent it from happening in the first place.
In this case, accounting and bookkeeping services can help. They can help you keep track of your inventory to see when items are missing and take immediate steps to solve the problem. Let's look closer at the causes of inventory shrinkage and how you can avoid it to prevent financial damage.
Inventory shrinkage is the loss of inventory products listed in your accounting records. You go over your list only to find that they're non-existent in the actual inventory warehouse. Many things can happen to stocks that lead to inventory shrinkage. Here are some common causes.
Physical damage is one of the most common causes of inventory shrinkage. It can be anything from damaged products in transit to expired items before reaching the warehouse. When this happens, you have to write off the loss or sell the product at a discounted price, affecting your finances.
Dishonest employees may steal or shoplift stocks from your company, causing inventory shrinkage and decreased profits. Since they're part of the internal company affairs, it'll be easy for them to cover things up and make it seem like there's just a minor clerical error.
Without an advanced inventory management system, you're left with manual work. This can be difficult and highly susceptible to human error, such as miscounting or misplacing items. Consequently, it'll be easy for stocks to go missing without anyone noticing, causing inventory shrinkage.
When you have a complex supply system, third parties can get a hold of your inventory. This gives them a chance to attempt sending defective or counterfeit products or shortchanging the agreed amount. It usually happens during the loading and unloading of the supplies, eventually causing inventory shrinkage.
Inventory management involves complex data and communication, especially with bookkeeping and accounting. Therefore, any error from these areas can cause shrinkage. Some examples include improperly received orders or miscommunication between accounting and warehouse departments.
The scenarios above can cause major inventory and accounting problems down the line.
Imagine how much work it will take to recover from those consequences—you’ll have more to add on your workload for sure. But that could only happen if you can't manage and monitor your stocks well.
Now that you know what causes inventory shrinkage, it's time to look for feasible solutions. Below are three effective ways to minimize or eliminate the risk of shrinkage using accounting and bookkeeping.
The first strategy for inventory shrinkage prevention is ensuring your financial books are up-to-date. This way, you can get an accurate view of available stocks in your warehouse at any given time. Doing this also allows you to catch errors and discrepancies quickly and apply immediate, corrective solutions as necessary.
The second solution is to invest in good inventory management software. This tool is typically automated and makes the tedious work easier for you. It allows you to track stocks in real-time, so you're aware of what's happening with your inventory 24/7. Additionally, an accounting software sends automatic alerts when there are changes or discrepancies in the system, reducing the risk of shrinkage.
The last solution on our list is improving communication within your team, especially in the accounting and inventory departments. Ensure that all teams are on the same page and know exactly what happens to the stocks all the time. This way, you can avoid data and communication errors that may lead to shrinkage.
You look at your business accounting records and actual inventory stocks and spot an inaccuracy: some items are missing! This situation is called inventory shrinkage, and it can cause huge problems for your small business, from order cancellations to major financial discrepancies.
Luckily, there are ways to avoid this financial nightmare. First, you must update your books accurately and regularly. Second, use automated inventory management software to your advantage. Lastly, practice effective communication within your company and with external parties involved in the inventory transactions. That way, you can minimize the risk of shrinkage and avoid major business downfalls.
Unsure of how or where to begin? Don't worry. You can rely on Unloop's accounting and bookkeeping services! We aim to provide an exact record and thorough analysis of your COGS and inventory figures. Moreover, we use accrual-based financial reporting to give you a monthly snapshot of your inventory.
This will help you stay consistently updated on your stocks and financials and determine profitability. By taking advantage of our services, you can rest assured that your inventory is being taken care of properly. So book a call today or ring us at +1 877 421 7270 to know more about our bookkeeping packages.
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.