What is Inventory Shrinkage in Retail? Definition, Causes, Formula, Impact on Business and Ways to Prevent Shrinkage of Inventory in 2023

December 08, 2022

Inventory plays a major role in the ability of eCommerce retailers to fulfill orders. Without enough inventory in stock, many problems can occur that ultimately lead to a disruption in the order fulfillment process, leading to unhappy and dissatisfied customers. A common occurrence that leads to this is inventory shrinkage.

There are several factors that can contribute to inventory shrinkage, including employee theft, shoplifting, vendor fraud, and errors in inventory management. Employee theft is one of the most common causes of inventory shrinkage, as employees may be tempted to take inventory for personal use or to sell it for profit. Shoplifting is also a common problem, as customers may attempt to steal inventory without being noticed.

Vendor fraud can also lead to inventory shrinkage, as vendors may manipulate their invoices to overcharge for items or deliver less inventory than was ordered. Inaccurate inventory management can also contribute to shrinkage, as mistakes in counting or recording inventory can lead to a discrepancy between the actual amount of inventory on hand and the amount recorded in the system.

Read further to understand what inventory shrinkage is, how to calculate it, its causes, impacts, and preventative measures.

Table Of Contents
  1. What is Inventory Shrinkage?
  2. How to Calculate Inventory Shrinkage?
  3. 6 Prominent Causes of Inventory Shrinkage in Retail Fulfilment
  4. Impacts of Inventory Shrinkage in Retail
  5. How to Avoid Inventory Shrinkage in 2023?
  6. Conclusion: How Can AI-Driven Inventory Optimisation Platform Like InventoryLogIQ Minimise Inventory Shrinkage in 2023?
  7. Inventory Shrinkage: FAQs

What is Inventory Shrinkage?

Inventory shrinkage is a common issue that plagues businesses and results in losses in different departments for companies. Inventory shrinkage can lead to a profit drop in your business unless it is addressed properly.

Inventory shrinkage refers to inventory that is reported in accounting records but does not exist in the physical inventory. It is essentially the unplanned loss of inventory due to a variety of factors, some of which are listed below:

  • Inventory theft, damage, miscounting, improper units of measure, evaporation, and other difficulties can lead to high inventory shrinkage levels.
  • Supplier fraud can also create inventory shrinkage in retail when a seller pays a supplier for a particular number of products to be supplied but the supplier does not dispatch all of the goods. As a result, the recipient records the entire cost of the products on the invoice but has fewer units in stock; inventory shrinkage is the disparity between the records and the actual stock that the seller has.
  • Shrinkage also causes profit loss. This is especially problematic in retail, as firms typically run with minute margins, have significant turnover, and are required to sell a large number of goods to remain profitable. 
  • Losses arising out of shrinkage will result in merchants being unable to repay the cost of that proportion of inventory. This is because there is no inventory to be sold or returned due to inventory shrinkage.

How to Calculate Inventory Shrinkage?

inventory shrinkage_formula
Source

Inventory shrinkage is determined by subtracting the total inventory received after the cycle count from the total financial worth of all inventory for the fiscal year or quarter. Inventory shrinkage is most commonly computed using the inventory shrinkage rate formula.

The following are some of the most important factors to consider while calculating the inventory shrinkage rate:

  • Determine how much inventory you have on hand.
  • Physically count the number of items in your inventory.
  • Subtract the total from the sum in your accounting journal.
  • Divide the amount by the value of inventory to arrive at a percentage.

The inventory shrinkage formula is as follows:

Inventory Shrinkage Rate = (Inventory Shrinkage / Recorded Inventory Count) * 100

To understand it better, consider the following example:

Suppose your business has 7000 pieces of a given commodity. During a physical check, you realize that there are only 6200 units. Thus:

Inventory Shrinkage = 800 [7000 (Actual Inventory) – 6200 (Physical Count)]

Inventory Shrinkage Rate = 11.4% (800(inventory shrinkage) /7000(actual inventory)) *100

Thus, your inventory shrinkage is 11.4% which implies that you have lost 11.4% of your inventory due to shrinkage.

6 Prominent Causes of Inventory Shrinkage in Retail Fulfilment

Inventory management is a crucial aspect of running a business. It can have a significant influence on the financial health of a company. Inventory is the means by which a business generates money, which appears as an asset on its financial statements. Inventory shrinkage reduces a company’s potential revenue and profit. Shrinkage can also lead to price increases, reduced employee bonuses, and a drop in total sales.

The primary causes of Inventory Shrinkage are as follows: 

Vendor Fraud

In organizations with complicated supply chains, inventory is sometimes managed directly by suppliers and vendors which are external parties that are not directly affiliated with the firm. Theft might happen while the items are loaded or unloaded while being transported from the supplier’s storage units to the business premises. Deliveries should be monitored and documented each time they enter or depart from the business premises as pilferage can easily occur, especially if the inventory is not being monitored by the business directly.

Administrative and Paperwork Errors

Even though most firms have switched from paper and spreadsheets to more advanced digital record-keeping, administrative and paperwork mistakes remain one of the biggest causes of shrinkage.

Pricing errors, unintentional reorders, missing or extra zeros, and decimal point omissions are all examples of administrative errors that can occur even on digital systems if they are not entered properly initially. Even if the organization relies on automated systems, inventory should be physically tallied and re-counted to reduce mistakes.

Damage

Anything that causes the inventory to become unsellable and not be in the same condition that it left the manufacturing line is referred to as damage. This covers things like shattered packaging, splits, rips, and water damage, among other things. Often, the inventory can be damaged while in transit. Products also suffer damage when they expire. If any of these incidents occur, sellers are forced to either sell what was once a perfectly serviceable good as a refurbished product or if the damage is severe, there are chances that it needs to be scrapped entirely, which means that the seller has incurred the expense of producing that unit but cannot recover the amount by selling it.

Human Error

Miscounting, inaccurate measurement units and improper portioning of food, drinks, and other types of inventory are all examples of typical human mistakes that lead to inventory shrinkage. Employees may store items inappropriately by mistake, resulting in waste or harm. This can even occur with advanced inventory management software in place if the person who is entering the numbers makes a mistake. This leads to confusion further down the supply chain and can have an impact on order fulfillment.

Waste and Spoilage

Although not all of the products that are damaged are discarded, some of them are perishable and once they are expired or spoiled, they can never be recovered. Perishable commodities include health care, food, dairy, medication, and various other categories of inventory. When a product is not sold before its expiration date, it goes to waste. Because you cannot sell expired products, the expense is accounted for as inventory shrinkage and it results in a loss for the business.

Theft

Employees must not only protect the business from inventory shrinkage but from other dishonest employees that might steal from the company. Employees may steal some of the company stock to make up for issues related to underpayment, lack of appreciation, or undervaluation they believe they are receiving. They may be able to rapidly conceal inventory theft since they are corporate insiders that know the inner workings of every operation.

When one item vanishes from a large supply of over a thousand products, the employer is likely unconcerned and the incident goes unnoticed until inventory is counted. Instead, the employer/accountant will believe that the merchandise went missing due to administrative mistakes when packaging or loading products onto a vehicle and will mark it as such.

Impacts of Inventory Shrinkage in Retail

Loss of Money

Profit margins are eroded as a result of shrinkage. Whenever an incident of theft, damage, miscounting, or other factors that lead to inventory shrinkage occurs, the business loses out on the opportunity to generate revenue and cash from those items. It also impacts your earnings because you must absorb the price of acquiring the items while making no profit on that item in return. Because retailers rely on thin margins to stay competitive, any event affecting profitability will likely have a negative impact.

Loss of Inventory

Buying items for your business and having a few of them stolen or damaged is an inexplicable feeling. Companies that lose things owing to inventory shrinkage can never retrieve them. This could occur in multiple ways whether it is employees or delivery personnel stealing unnoticed items, goods being damaged due to human error or while in transit or there is a miscommunication while counting inventory. Every unit of inventory is valuable for a business because it is the means by which they recover their expenditure and if any of it is unaccounted for, the business loses out on that revenue.

Miscalculations in Tax and Accounting

Missing goods due to shrinkage may result in miscalculations in accounting procedures. Audit and tax issues might arise when accounting books are not aligned, which could have dire financial and legal consequences for the business. Thus, if you have inventory shrinkage issues, be cautious with your accounting books and ensure that they tally.

Suggested Read: What is Inventory Accuracy?

How to Avoid Inventory Shrinkage in 2023?

Though inventory shrinkage in retail is a persistent problem, it can be curbed and dealt with in several ways. Irrespective of whether you have a warehouse or your store, any combination of these measures below may be effective in reducing inventory shrinkage

Use Inventory Tracking

It is not difficult to track products. Tracking your inventory can help determine whether a piece of merchandise has vanished from the warehouse or the retail floor and due to what reasons. There are several methods for keeping track of your inventory.

  • You can begin by labeling each product with a tagging system. 
  • You can follow the movement of any product by using this method, even if you are not physically present.
  • RFIDs are another option that can aid in decreasing shrinkage due to theft. 
  • RFID tags are becoming increasingly popular because they allow businesses to track goods as they move about the store and even trigger an alert when they leave the premises. 

Have Periodic Counts of Inventory

A periodic count of inventory can help you keep track of your stocks on a routine basis to save time. 

  • Instead of using Excel, which is standalone and not synchronized to anything, it is advisable to employ techniques such as inventory management software, that can maintain inventory counts which are updated in real-time.
  • You might use inventory cycle counts to do this. Inventory cycle counting is a method of having your pickers perform inventory counts on segments of your stock on a regular basis.
  • It is frequently associated with the use of a barcode inventory management system.
  • It allows you to keep a more precise stock count at all times.

Conduct Audits

If you conduct periodic inventory audits, your employees will understand the importance of inventory to the company’s profitability and bottom line.

  • Management might perform inventory audits on smaller amounts of merchandise more often, sometimes daily, to keep personnel on their toes. 
  • This form of audit is known as “cycle counting” and is an excellent approach to daily inventory tracking.
  • You can also use accounting to compare the amount of available stock at your physical location to the amount of stock recorded in your accounting system. This process is known as stocktaking and ensures that the physical inventory count and the accounting records are in sync. This sort of audit does not have a specific time frame.

Use Strict Security Measures

A robust surveillance program can help reduce inventory shrinkage while assisting with inventory audits. 

  • Try installing and positioning surveillance cameras around all of your stock locations.
  • The theft warning signs will assist you in reducing inventory shrinkage.
  • The most comprehensive security for your inventory stockpiles is CCTV and warning indicators.
  • You will have a complete awareness of what’s going on in your shop if you use video monitoring. 
  • You may also identify who stole from your business using video recordings, giving authorities a place to start their investigation in case of any theft. 
  •  Since your employees know they are being watched and tracked, they will be less inclined to steal if you install video surveillance.

Divide Responsibilities

If one person has access to receipt recording and processing, they may feel compelled to falsify the reports for their gain. 

  • You may avoid this by delegating receipt recording and processing to various staff or at the very least, for quality control purposes.
  • By doing this, you can spread the responsibility and accountability for proper inventory management to minimize inventory shrinkage.

Make Employees Aware

Employees may be unaware of the consequences of inventory shrinkage in retail inventory management. They must understand that a minor mistake or error can have a significant financial impact which may also impact their pockets if the business goes under.

  • Use this as your chance to explain how shrinkage impacts them, both directly and indirectly, such as how it reduces promotions, salaries, and employee profit-sharing, among other things.
  • However, as an employer, you are responsible for providing them with the tools they require to reduce mistakes and carelessness.
  • This entails having simple inventory systems that don’t need much technical expertise to learn. You can then provide general training and offer sufficient onboarding for new employees.

Partner With a 3PL

Third-party or 3PL logistics companies assist eCommerce businesses by storing goods in various fulfillment centers, picking and packing service procedures, and shipping orders.

  • They have the resources to keep your goods safe and secure while allowing you to outsource fulfillment, which may be costly and inefficient to operate in-house.
  • Most 3PLs offer comprehensive information and technology to assist you in keeping track of stock levels and reducing inventory shrinkage.
  • Small and medium-sized businesses often do not have access to such advanced infrastructure so employing can instantly limit errors and reduce inventory shrinkage.
  • They help in ERP inventory management, ABC analysis, keeping track of inventory management KPIs, and inventory optimization.

Inventory shrinkage may be eroding your revenues without your knowledge. It can have several negative consequences for your company and may impact the relationships between your company and suppliers and also between members of your team. Hence, it is essential to prevent inventory shrinkage to the maximum extent possible. To that end, you can utilize the services of 3PLs such as WareIQ, which offer several professional services like inventory management and order tracking, to ensure that you are constantly aware of your stock flow which is especially useful for companies that are expanding and are finding it difficult to manage eCommerce operations on their own.

Suggested Read: Inventory Position: Definition, Importance and 3 Ways To Position Your Inventory In 2023

Conclusion: How Can AI-Driven Inventory Optimisation Platform Like InventoryLogIQ Minimise Inventory Shrinkage in 2023?

Inventory shrinkage is the loss of inventory that occurs for various reasons, such as theft, damage, or simply inaccurate record-keeping. It is a common problem for businesses, as it can lead to decreased profits and a lack of inventory on hand to meet customer demand.

To combat inventory shrinkage, businesses can implement several strategies. These include implementing security measures, such as surveillance cameras and security guards, to deter theft and catch perpetrators. Conducting regular inventory counts and audits can also help identify any discrepancies and allow for corrective action to be taken.

In addition, implementing strict policies and procedures for inventory management and tracking can help prevent errors and ensure that inventory levels are accurately recorded. Building strong relationships with vendors and regularly reviewing their invoices can also help prevent vendor fraud.

Overall, inventory shrinkage is a significant problem for businesses, as it can lead to decreased profits and a lack of inventory on hand to meet customer demand. By implementing effective strategies and staying vigilant, businesses can minimize shrinkage and protect their inventory.

Inventory LogIQ, an intelligent inventory optimization solution has helped multiple leading fashion & lifestyle brands (Blissclub, TCNS (Aurelia, W, Wishful), Future Group, Aditya Birla Group, Leemboodi Fashion, Flipkart Fashion, Siril) to minimise inventory shrinkage that has helped to:

  • Decrease inventory holding costs by 40%
  • Increase product availability to 99%+
  • Make faster deliveries for over 70% of the demand
inventory shrinkage_Inventorylogiq
  • We can assist in managing your inventory turnover rate and lowering your inventory carrying expenses to save money for your company.
  • We have a state-of-the-art IMS that can keep track of your inventory across multiple platforms and fulfillment centers to prevent inventory shrinkage and can also integrate with multiple eCommerce selling platforms.

Suggested Read: What is Inventory Valuation? Importance, Objectives, Methods, and Challenges in 2023

Inventory Shrinkage: FAQs

Supercharge your fulfilment with InventoryLogIQ now, contact our team.

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Inventory Cycle Count: A Detailed Guide Including Definition, Methods, Advantages and Processes in 2023

Inventory Cycle Count: A Detailed Guide Including Definition, Methods, Advantages and Processes in 2023

If you are an eCommerce seller, inventory becomes your biggest asset to invest in. Having inventory cycle counts is important because it can prevent losing out on sales and revenue. Inventory disparities are a problem that can be resolved relatively quickly. Every firm should strive to run accurate inventory cycle counts. For warehouse and returns management, general logistics and sales forecasting to be successful, accurate inventory counts are essential. Accurate cycle counting has an impact on almost every part of your company and its effects can last for years. It is a crucial component of inventory management procedures used by many firms since it ultimately ensures that consumers can obtain what they want when they want it while minimizing the costs associated with maintaining goods on hand. Today, we will learn about the method of controlling inventory through inventory cycle counts, what inventory cycle counting is, how it can improve your inventory accuracy to avoid stockouts and the best practices for implementing it. What is an Inventory Cycle Count? An inventory cycle count, also called cycle counting, is an inventory counting method that decreases the need for conventional audits by rotating product counts in a cyclical schedule. For large warehouses with a huge number of several distinct product types, inventory cycle counting is the preferred method. Cycle counting helps businesses operate effective, cost-friendly and time-saving inventory counts. Inventory cycle counts are commonly referred for inventory cycle audits. Different Methods of Inventory Cycle Counting ABC Cycle Counting This approach is used for inventory counts that are based on the Pareto Principle when counting more expensive, faster-moving items. According to ABC cycle counting, 20% of the parts in a warehouse correspond to 80% of the sales. These are the "A" items (the "B" items make up 30% of the inventory and 15% of the sales and so on.). Your most valuable assets or fastest-moving SKUs might be "A" goods.  Software for inventory control can classify the counts as A, B or C goods. Consider counting your "A" items more frequently while counting your "B" and "C" goods less frequently. You can use additional indicators like transactions and production figures to start ABC cycle counting. You can determine which products significantly affect your company's overall inventory cost using a variety of measures. Read to learn about what is ABC Analysis. Usage-Based Cycle Counting Any time an item is transferred (part of inventory transfer), whether it is through a manufacturer, distributor or eventually to the client, there is a chance that the inventory will vary. 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This will help reduce costs and wastage associated with over-ordering. Helps With Production Source Doing routine inventory cycle counts will help you plan your production to meet your demand and produce the proper quantities at the appropriate time to prevent making products that will occupy storage space. Assists in Sales & Marketing Source Inventory cycle counts can enable you to discuss with your sales team what is and is not selling. It will improve internal business relationships and generate more revenue as a result. Check on extra products and plan promotions to assist in generating sales.  Helps in Financing Source An inventory cycle count is necessary for many accounting computations. Cycle counting makes it possible for you to run reports and calculate data with the assurance that there won't need to be any large recalculations throughout tax season. Saves Time and Effort Source Cycle counting is more efficient than lengthy annual inventory counts because it can break up the monotony of protracted inventory audits. Therefore, you generally won't need to close your business or ask your staff to skip work in order to count your inventory. Additionally, regular inventory cycle counts make it simpler to locate misplaced, harmed or stolen goods in a sizable warehouse inventory. Saves Monetary Resources Source An inventory cycle count will also help you save money. To fully count every item in your inventory, annual counts frequently necessitate overtime hours. Setting aside time in daily or weekly chunks to count groupings of goods works out to be more economical. Processes Involved in an Inventory Cycle Count in 2023 Warehouses start inventory cycle counting to avoid the root causes of errors in tabulating inventory. 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What is Physical Stock? Meaning, Types, Steps & Best Practices of Physical Inventory Counting Methods in 2023

What is Physical Stock? Meaning, Types, Steps & Best Practices of Physical Inventory Counting Methods in 2023

The highest growth rate the sector has had since 2011 was $5.15 trillion in retail spending in physical locations in 2021. Retailers are retaining more inventory than ever before to meet demand. It's understandable why the number of warehouses in the US has been steadily rising since 2013. Despite the exponential rise in warehouse storage and inventory levels, evidence indicates that merchants aren't doing a great job controlling their goods. Only 8% of smaller companies keep track of their inventory. Pen and paper are used manually by another 14% of people. This article will explain the advantages of maintaining a physical inventory count for your retail shop as well as how to go about doing it. The tangible goods that retail establishments, manufacturing facilities, and warehouses stock are essential. Companies should do physical inventory counts of their products to maintain appropriate and correct inventory levels. 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Suggested Read: What is a Periodic Inventory System? 4 Major Purposes of Conducting Physical Inventory Count The physical inventory count serves a variety of functions, which includes: Ensuring Accurate Stock Levels Physical inventory levels frequently differ from what digital records indicate. For instance, inventory levels might change in a production setting if a worker takes a replacement item but fails to register it. Employees may unintentionally enter inaccurate inventory into the system when working in retail. Additionally, there have been incidents of stealing, theft, damage, or incorrectly recorded returns, giveaways, or ruined goods. The physical inventory levels go out of sync with the records when this occurs. The resolution of a physical count can explain these differences. Keeping Track of Theft, Damaged Goods or Internal Problems A corporation can monitor for internal and external theft, damaged items, or internal problems by doing physical inventory counts. Theft, often known as shrinkage in the context of inventory, may make it difficult for firms to stay profitable. Employees must also take proper care of damaged inventory by reporting the damage to a manager or supervisor so that inventory levels may be adjusted and the product can be returned to the manufacturer for a warranty replacement or credit. The need for staff training on inventory protocol, shipping and receiving policies, or manufacturing best practices is just one internal issue that inventory counts might highlight. Reporting Wages and Income Accurate revenue statements and other financial papers may be produced by businesses with the use of adequate inventory levels for reporting. For instance, making actual earnings and precise balance sheet statements depend on maintaining an accurate inventory. The board of directors, top management, and investors of an organization utilize this data to make choices regarding the course of the business. The accuracy of revenue, wages, and inventories is so crucial. Creating a Precise Budget Inventory counts are also used by businesses to assess how much has been sold and how much stock is still available. When determining which things are the most popular, this might give helpful information regarding the inventory turnover rate or how frequently the item sells. As a result, this can assist businesses in developing a precise inventory budget. They may choose which items and how many of each to have on hand. To prepare for the upcoming year's purchases, a retail business can, for instance, do an inventory count on seasonal items. 6 Main Types of Physical Inventory Count Methods The main types of physical inventory counting procedures include: Point-of-Sale or Electronic Counting Electronic counting scans and tracks goods digitally using specialized computer tracking software. For instance, many businesses utilize point-of-sale (POS) systems, which enable staff to scan things as consumers buy them. The application automatically subtracts the quantity from the inventory as soon as the buyer purchases the item, and the team monitors it through the POS system. The warehouse receiver adds new products to the system when the shop gets them using the same technology to increase stock. POS systems frequently communicate with other types of software, such as enterprise resource planning, accounting, or merchandising software. The firm employees may, for instance, conduct a physical inventory count to ensure that the physical and digital numbers match. Although this technology helps to increase inventory accuracy, the associated fees might raise a company's costs. Employees have time to become familiar with the system and appropriately carry out the operations. Manually Counting  Unlike automated counting, manual inventory counting involves staff members writing down the inventory results on paper. The management of a corporation can assign workers as necessary or have a dedicated employee or team perform physical inventory counts. To count, they can go about the shop, warehouse, or storage area to identify the things and add up the amounts using a spreadsheet or printout of the products. By using this technique, a business might avoid paying for the initial expenditures of building an electronic system. It is also helpful in confirming POS system findings. It's crucial to remember that human inventory counting might produce a range of results based on the size of the business, the accuracy, and the care taken by the counters. Periodic Counting Periodic Counting or Cycle counting is a method of physical inventory counting in small increments over the course of a month or year. For instance, to assure accurate data, a retail shop would tally the most popular produce items each Monday morning. Fourth Tuesdays, the specialized section receives a similar treatment, and so on. The corporation will gain from this in a number of ways. First of all, it enables the business to continue operating rather than shutting down to finish an entire physical inventory count. Additionally, since inventory is constantly counted and faults can be found promptly, it enables any inconsistencies to be resolved sooner. This is advantageous for quickly transporting goods or products that the business wishes to monitor. Many companies choose to perform a complete inventory count once a year and the regular cycle counts. Complete Physical Counting Companies frequently do a comprehensive physical inventory once a year. Organizations can utilize their own workers to count, engage temporary help, or pay an inventory counting agency to complete this task. Many organizations arrange shelves, storerooms, and warehouses before finishing a complete inventory to make sure that goods are located correctly and are simple to find. Depending on how things go at the firm, the business may temporarily close or stay open on inventory day. Counters can be given inventory lists or spreadsheets by managers, along with instructions on how to record the number of things sold accurately. At the conclusion of physical inventory counting, all counters give in their sheets to the supervisors, who then compile the findings. Spot Counting Spot counting, arbitrary counting or ad-hoc counting is a type of physical inventory counting method that is frequently started by the user and is not planned, making it useful in unusual circumstances. Let's say you counted a zone, but a few days later, the system malfunctioned because of someone or some procedure. Instead of waiting for the next cycle count, you can construct a new, empty order and begin adding counted items to it. Of course, your system must be able to compare the quantity that was tallied to the data stored in the program. Arbitrary counting is sometimes referred to as blind counting since it typically takes place in unplanned, tiny store/warehouse zones or locations. Tag Counting The personnel of the store or warehouse should physically tag each item prior to tag counting. The worker must complete the required slots on the tag with the item ID, counted amount, and other pertinent information during physical inventory counting. Some labels have two sides, allowing an additional worker to check the data and, if necessary, fill in the adjustment on the second side. These tags are gathered and added to the system as journals when the counting procedure is complete. The primary distinction between tag counting and all other counting techniques is that tag counting does not involve a direct comparison to system data. As opposed to just producing a counting order and comparing it to the tag counting list, it is more like creating a rough draught list of your goods and quantities, refining it (e.g., updating with sales that have occurred during the counting), and then comparing it to the final list. How to Conduct a Physical Inventory Count in 12 Easy Steps A successful retail business is built on effective inventory management. Customers will always find what they're looking for in a well-stocked backroom, and your workers will always have what they need to do their jobs. In the best-case scenario, organized stock supports your everyday operations so that personnel may concentrate on customers. At worst, you're left with a logistical nightmare of missing items and lost sales. Your staff will need to count meticulously, track, and process products on a regular basis to keep your inventory operating correctly. Are they driven to complete the assignment as inventory season approaches, or would they prefer to skulk off? The given steps for counting physical inventory can help you manage stress if you run a retail firm. Let's take a look: Check the Date It can be a big deal if you have to manually count your physical inventory every month, every three months, or at the conclusion of a reporting period. It may be necessary to take stock outside of regular business hours because it is a laborious operation. Give your team plenty of warning so they can plan accordingly around their commitments, and be sure to schedule workers correctly, so nobody takes on an opening shift. Post a sign in your store or on your social media accounts informing clients if you need to close your store during regular business hours. The secret is to plan. Assign Your Counters Physical inventory counting needs expertise. Before you allocate your counters, make the position a learning opportunity for both inexperienced and experienced workers by letting them train one another and providing checks and balances along the way. Make a written protocol and include information on how you'll establish a precise cut-off point for stock movement for an accurate count. Count teams typically consist of two individuals - one who counts and the other who records. To make sure that everyone will be accessible on the specified day and time, provide your team with their schedules as far in advance as you can. Notify All Storage Facilities Make sure to inform relevant third parties that they should likewise undertake a physical count of inventory on the given date, whether your organization has merchandise in outside storage or on consignment. To ensure that they are not counted, make careful to separate any recently acquired products. Deliveries to the warehouse should be delayed if at all feasible to prevent variations from occurring during the count. Before starting the count, you'll want everything to be free of clutter. Examine Your Stock A few days ahead of time, check your inventory to make sure everything is in order. Search for objects with missing or partial component numbers and those that are in a state that might complicate the procedure. Adjust your inventory as needed to make it ready for the physical count. Make a Proper Warehouse Plan Make sure your staff has a map of your floor, backroom, and storage so they know where to go when they need to. A map can let you allocate personnel to their stations more efficiently, whether you need to take photographs or sketch up a plan. Create a tracking sheet for each sector and assign a different number to each display, rack, and shelf. Visualizing your inventory area will reduce confusion and make it easier for your personnel to get started. Make Your Own Category You may count and group comparable objects together with the aid of categories. The categories for a retail setting may be footwear, tops, bottoms, outerwear, and accessories. Depending on your industry, these groups can be further divided based on color or gender. The counting procedure will be more smoothly executed if a systematic system is created. You'll run into certain things that don't have a designated spot in your store when you're arranging your physical count. It would be best if you made a decision on how to handle objects without a clear home. They can be transferred or returned from other places. Start the Pre-Count Make sure everything is tagged correctly and labeled before the count starts. After all the things have been tallied, failure to deal with stray objects can lead to problems and anger. Start early by counting some of the items. Put the objects that were counted in sealed boxes when the pre-count is done. The goods will need to be recounted if, on the day of the physical count, you discover broken seals on packets that have already been counted. Set Frequent Reminders Give your staff a review of what they learned in training before the big day. Walk your staff around the shop if you've relocated any stations or merchandise to prevent confusion. Distribute instructions that break down the counting procedure into simple stages. Despite the fact that there shouldn't be any things without labels or pricing, emphasize the significance of gathering such items in a specific location so they may be handled last. Explain the Procedure Lead by example and demonstrate to your staff the correct way to do a physical inventory count. Give them a sample of a completed form, then have them go over their initial try to ensure the form was filled out correctly. Assign the count teams to various areas of the shop using the map. To prevent double-counting, mark the regions on the map that have been counted. Get Set and Go Counting You may pair off your teams and start physical inventory counting now. The second person completes the count tag using the sample data below after the first person has finished counting: LocationItem informationportion numberQuantityMeasurement unit The team attaches the original count tag to the inventory item, keeps a copy, and turns the tags into the person in charge. The person in charge will verify that all titles have been completed entirely and none are missing. Recheck Your Possessions Perform spot checks in sections to see whether the items were appropriately counted. Take advantage of the chance to verify each section doubly if this stock audit finds a mistake. It will be worthwhile to double-check the counts that have previously been made. To assure the correctness of the inputs, a data entry team should additionally include two members. Complete the Reporting To add up your computations, record your physical inventory counts on a spreadsheet. Your inventory reports will enable you to find any discrepancies between the physical and book counts so that you can develop a strategy to eliminate them. To find potential patterns, compile physical count inventory records over a specified time period. Is there, for instance, a particular low-count spot in your store? Are there any procedures you might strengthen to prevent the loss of goods? Your business should be impacted by your reports and results in all areas, from financing to visual merchandising. 5 Benefits of Physical Stock Counting in 2023 To maintain accurate and up-to-date inventory records, physical inventory counts are a crucial component. Better sales and purchase estimates may be made thanks to correct inventory records, which also guarantee that you always have the proper quantity of stock on hand. Your consumers will benefit from having a physical inventory taken. Precise physical inventory counts are essential for the reasons listed below: Provides an Accurate Insight Into Inventory Levels  You will have a far better knowledge of how much merchandise you will need to have on hand to satisfy consumer needs when you effectively manage your inventory. You won't have to worry about running out of supplies all the time, thanks to this. By being aware of your inventory levels, you may prevent clients from making orders for items that are not currently in stock. Without having to worry about keeping too many goods on hand, shortages will be less of an issue. Improves Demand Predictions An essential component of inventory management is demand forecasting. It occurs when you foresee a product's level of demand, the rate at which it will sell out, and the time at which that SKU has to be restocked. A physical inventory check can enhance buying and forecasting of inventories. For example, retailers that see demand forecasting reports that suggest which products to replenish based on their profitability and restock rate can do so in a way that allows them to do so based on both the popularity and profitability of the items. Suggested Read: What is Inventory Forecasting? Enhances Sell-Through Rate of Slow-Moving Inventory An actual inventory count does more than avoid stockouts. Retailers also reduce the chance of keeping out-of-date stock at the total price for an extended period of time. Retailers should have access to inventory grading data that group items according to their cost per unit, selling price, number of sold units, and overall income over time. Merchants should proactively think about re-merchandising items in-store, advertising them to generate interest, or offering a special discount to encourage sales for those that aren't selling as intended. In order to recover your initial investment and create a place for more in-demand goods that either sell at a larger volume, have better profit, or both, it is helpful to move through failing inventory. Reduces Inventory Shrinkage Inventory loss is a frequent and annoying issue for merchants. When your actual stock is less than the amount listed in your inventory management software, this occurs. Theft by employees and shoplifting are the two main reasons for stock shrinkage. A weekly partial inventory count, for instance, can assist retailers in identifying discrepancies between a store's actual inventory and the inventory levels recorded in its point-of-sale system with a smaller sample size of inventory that is easier to count (one particular product category, for example), giving them enough time to determine what caused the shrinkage and reconcile it. Prevents Overstocking and Understocking  Lack of physical inventory tracking can lead to carrying too much (or not enough) goods, which could lead to budgetary concerns if not maintained under control. Overstocking, often known as the gap between available inventory and demand, has resulted in markdowns totaling more than $300 billion. Discounting at scale leads to lost income because of lower-than-expected margins on each transaction, despite the fact that it has valuable use cases. You can allocate enough money to inventory to satisfy demand without overstocking or understocking by maintaining an accurate inventory ledger and using the information from your POS system to understand better how well-liked the products you carry are with customers. 7 Best Practices to Implement for Counting Physical Stock in 2023 Make a Map of Your Shop, Warehouse or Stockroom Source Make a map of the locations where your inventory is kept, whether it be on your shop floor, in a stockroom, or in a warehouse, as part of your preparations. Label each product category's location and the person in charge of counting it on the map. This will aid store employees in getting their bearings and assist the manager you assigned to maintain track of who is in charge of what. Give each employee a list of the SKUs they will count in their assigned region as well. This may be a helpful tool when they scan product barcodes and enter their count into the POS system. Use Box and Shelf Labels Source Label shelves and boxes according to the things they hold and make sure the contents of each are located where they should be according to a map of your store. The shop map you made in the previous step should be reflected in these labels. Prior to the inventory count, it will be easier to stay organized and save time when it comes time to account for the miscellaneous things if boxes and shelves are proactively labeled and products are placed in their proper locations. Clean the Locations Where You are Counting Source Make sure there is enough space for employees to count large quantities of items in each location designated for stock-taking. Get rid of any boxes or inventory items that are unnecessary. Any freestanding furniture, such as mannequins or display cases, should be moved to one side. Use Barcode Readers Source While it is possible to hand count the objects, teams are more prone to make mistakes. For quicker and more accurate counting, choose barcode scanners. Store employees scan the barcode on the product's tag, and the inventory levels connected with that product's SKU are automatically entered into the POS system as opposed to each product having to be manually counted and recorded in a spreadsheet or on paper. Mis-counts are unlikely unless the store employee scans the exact same item twice. Barcode scanners are necessary for teams charged with counting enormous volumes of merchandise. Set a Time When Counting Will Be Handy Source Setting a deadline for your inventory count is worthwhile. Depending on how many things you carry, performing a physical count can take one business a whole day and another just a few. In either case, giving oneself too much time is preferable to not enough. Additionally, some retailers choose to conduct nighttime inventory counts, appointing a team of staff to enter the premises during off-hours. Just bear in mind that in many areas, paying employees more for midnight labor than for a shift during regular business hours is the norm. Train and Inform Staff Members Source Before beginning a comprehensive physical inventory count, take the time to teach and instruct your store personnel on how to perform it. To count inventory and record outcomes, every member of your team should be able to operate a barcode scanner and your POS system. Spend some time outlining the typical difficulties they may encounter. What happens if a tag is missing, a product is defective, or a label is mislabeled? To ensure that staff members know what to do in each instance, share the solution and the procedure you've put in place. Utilize Technology for Physical Inventory Count Source Pen and paper counting takes more time than electronic counting. It's simple to make a mistake when counting, leading to erroneous inventory data. Additionally, a physical stock count across many retail locations will generate more data that will require much more time to process and understand than if everything were recorded using inventory management software. Inventor management technology provides solutions to these issues. Inventory reconciliation is sped up, and merchants have a single source of truth for both their financials and inventory when they scan products since the point-of-sale system will automatically register inventory levels for that SKU. Suggested Read: Supply Chain Forecasting Conclusion: Improve Your Physical Inventory Counts With InventoryLogIQ In conclusion, it is crucial to perform routine physical inventory counts even if you have an inventory management system in case-specific procedures are not operating as effectively as they should. Inventory counts assist you in reducing unexpected shortages and identifying which internal processes need to be changed to enhance your business operations as a whole. One of the top providers of inventory and data-collecting services is InventoryLogIQ. We offer physical inventory counting, merchandise planning and space optimization services to the majority of large retailers across the nation using our custom OMS and professional team. The integrated, one-handed inventory count terminal and warehouse management solutions are the technological advancements from which InventoryLogIQ continues to hold an excellent reputation in the market. This will not only handle your complete inventory but also make doing an inventory count simple by offering a section just for counting your inventory and notifying you right away if there are any shortages or exceeding stock. Physical Stock: FAQs Why is the physical inventory count performed?The Inventory account balance is updated to reflect the actual amount of accessible inventory using the physical count. To ascertain whether there have been any theft, loss, damage, or inaccuracies in inventory, a physical count is performed. How frequently should physical inventory counts take place?At the very least once a year, a physical inventory count should be done, however more regular inspections might be helpful. You may ensure that your inventory and your records match by frequently verifying your stock. Additionally, you'll be able to see any issues with your record-keeping practices. How is physical inventory managed?Wireless inventory scanners make it simple to scan a product wherever it is stored using barcodes to distinguish between each SKU type. You can simply monitor things by SKU, know how much is in stock, and identify every SKU in a warehouse by adding a barcode to your product tags or packaging.

March 24, 2023
Perpetual Inventory System Guide: Definition, Methods, Factors Considered, Benefits & How is Perpetual Inventory Different From Periodic Inventory Systems in 2023

Perpetual Inventory System Guide: Definition, Methods, Factors Considered, Benefits & How is Perpetual Inventory Different From Periodic Inventory Systems in 2023

For any sustainable and successful business, a sound inventory system is required to track goods throughout the supply chain cycle. From purchasing raw materials to producing the goods and, finally, selling the product, proper inventory management is key. It’s an effective system that keeps records of purchased materials, sales inventory and also stock-on-hand details of your business entity. The fundamental structure of inventory management includes inventory purchase (ready-to-sell goods that are procured and delivered to the point of sale or warehouse), storage of inventory (inventory that is stored until needed) and goods and materials that are at different stages of the fulfillment network. There are two types of inventory, as stated below:  Periodic Inventory Perpetual Inventory  While both these accounting methods are similar (businesses use them to track the number of products, stock availability, etc.), they have several inherent differences. What is a Perpetual Inventory System? A perpetual inventory system allows businesses to keep a real-time account or stock of inventory on hand. The widespread usage of computers and technology has made this system very effective. Businesses worldwide have found that this system is highly user-friendly and has fostered the ease of conducting various processes, eliminating redundancies and complexities of the traditional inventory system. Barcodes, Radio Frequency Identification Scanners (RFID) and point of sales systems supported by perpetual inventory systems quickly input inventory information of all business transactions on a real-time basis. Perpetual Inventory Systems are popular in modern business. They are often found in large businesses across multiple industries, such as jewelers, electronic stores and global enterprises such as restaurant chains, clothing stores, etc. Perpetual inventory systems track the details of product sales instantly through point-of-sale systems (PoS). However, perpetual inventory does not keep track of physical stock/products. Inventory reports can be accessed online at any time, making it easier to manage inventory levels and the cash needed to purchase additional inventory. Updates are automatically created when you receive or sell inventory. Your inventory accounts immediately reflect data about purchases, return of goods and stock data. 6 Main Differences Between Perpetual Inventory and Periodic Inventory Systems A perpetual inventory system constantly updates the purchase and sales records constantly, which provides a real-time reflection into what is staying or leaving the warehouse. A periodic inventory system only records updates to inventory and costs of sales at scheduled times throughout the year, not on a constant basis. While a perpetual inventory system can record and monitor the movement of the stock non-stop, a periodic inventory system can update inventory records at intervals, which happens after the stock is physically accounted for. The 6 main differences are listed in the table below: [table id=1 /] Advantages of Perpetual Inventory There are multiple advantages of perpetual inventory, which gives companies the ability to operate more effectively. They are listed below: Provides Updates in Real-Time Perpetual inventory maintains live records of inventory as soon as it is bought or obtained by the company. This enables the retailer to always be aware of when stocks are running low, which items are popular, when items were bought etc., so they can plan accordingly and be ahead of the curve. Manages Inventory in Multiple Warehouses Gone are the days when companies had to maintain multiple spreadsheets or files and manually add and remove items from the list. Perpetual inventory systems consolidate all your inventory records which is stored across multiple warehouses in one place. This will help make processes more efficient and will surely mitigate any errors or delays. Keeps Users Informed Through Forecasting Using perpetual inventory, retailers have a better idea of their customers' purchasing patterns based on the inventory sold. They will have a better idea of which products are in demand, during which season and which price point is doing the best. They will also get an idea of which products aren’t doing well and are just accumulating space in the warehouse. This understanding will help the business forecast demand and supply in the future. Suggested Read: What is Inventory Forecasting? Assists in Accounting Procedures Inventory is a key aspect of every accounting process as it gauges the value of the assets that firms have on hand. Since perpetual inventory systems constantly track and provide updates on inventory levels, it becomes much easier and faster to access this information. Disadvantages of Perpetual Inventory Can be Expensive Perpetual inventory is generally regarded as not being a pocket-friendly solution because of all the technology and software that is needed to enable it. Adding new inventory lists can also be chargeable, in addition to needing to train employees on how to use them. Overall, it may not be the best option for small businesses that do not need to calculate inventory for multiple different warehouses. Does Not Consider Expired and Mishandled Goods  Since perpetual inventory systems utilize data from sales and purchases to maintain records of inventory, it sometimes leaves out items that have been purchased but may have expired or have broken due to mishandling. Since manual counts are not performed, the management will continue to count those items unless someone has physically noticed the incident. This opens the door for unwanted errors and discrepancies in the inventory count. 5 Operations of a Perpetual Inventory System Point-of-Sale System A point-of-sale or point-of-purchase in a perpetual inventory system is the place where the customer walks up to your checkout counter after they pick up a product or service at a store or business entity. A point-of-sale is the combination of hardware units and software applications that enable your business to make those sales to customers. Cost of Goods Sold Updates Cost of goods sold (COGS) refers to the direct costs of the production of goods sold by a company. This includes the cost of the materials procured and labor hired to create the goods. Indirect expenses like distribution costs and sales force costs are excluded in COGS. Reorder Point Automation A reorder point system alerts you about when to place an order, so you won't run out of stock and tells you when to place a requisition to replenish your stocks. The reorder automation point automatically calculates your stock based on supply chain forecasting that is based on past consumption data (historical data) to forecast future requirements. Purchase Order Automation Purchase Order Automation Systems streamline your purchase orders to increase efficiency by tallying with the corresponding invoice and requisition purchase requests automatically. Warehouse Management Software Typically, any warehouse management system (WMS) is designed to monitor the entire inventory in hand. It can also manage supply chain operations right from the manufacturing or distribution center and can coordinate with different parts of the supply chain to get tasks done. 6 Things to Consider Before Choosing An Inventory System Requirements Source You first need to assess your requirements and make a decision based on that. A small business would require a very different inventory management system than a multinational company. You would need to be aware of how much inventory you would need to manage, the nature of the inventory, the value of the items, etc. Expenses Source Because of the fact that certain inventory management systems are so dependent on technology, such as the perpetual inventory system, prices can easily skyrocket, which would be pointless if you don’t need all those features in the first place. Choose a system that fits your budget so that you can invest in other facets of your business. Configuration Options Source If your business deals with multiple types of inventory, scattered across different warehouses, it would be important to make a note of the customizability of the system so that you can get the most out of it. It would not be of any help if you are not able to manage your inventory as efficiently as possible due to constraints in your inventory management software. Ease of Use Source It is important for businesses, especially smaller ones, to factor in ease of use when they are opting for an inventory management system. If the system is too complicated and requires a sharp learning curve, it could take days for your employees to get accustomed to it. Choose a system that has all the features you are looking for but that is also well-designed and user-friendly. Integration Ability Source Inventory is the key component of any eCommerce business. It pays off to have an inventory management system that can play nice with other software tools and systems involved in other business activities. There shouldn’t be a bottleneck in any section of the business and you can do your best to make sure your inventory management system can integrate well with other applications. Flexibility Source Flexibility is a very important factor to consider while choosing an inventory management system since it’ll be handling such a key aspect of your business. You need to find out things like if it is compatible with devices of all screen sizes, what software platform it uses and if it can integrate with other systems. Once you understand this, it’ll make your decision much easier. Support Source After-sales support is a key factor when choosing an inventory management system, especially if you have shelled out a decent amount. You would want to have access to facilities such as tutorials and customer support in case something goes wrong and you need some assistance. Companies that care about their customers even after the sale is made often provide the best services. The 3 Main Methods of a Perpetual Inventory System FIFO Perpetual Inventory Method FIFO is a cost flow tracking system under which the first unit of inventory acquired is considered to be the first unit consumed or sold. The perpetual FIFO inventory method determines the cost of your oldest inventory and multiplies that cost by the total amount of inventory sold. LIFO Perpetual Inventory Method This method is a cost flow assumption that businesses use to evaluate their stocks wherein the last items placed in inventory are the first items sold. To Summarise, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. Weight Averaging Cost Perpetual Inventory Method The weighted average cost method is a means of tracking inventory that assigns a cost to each unit based on the average cost of all units that are available for sale during a specified time period. The weighted average cost per unit is arrived at by adding the total cost of all units available for sale divided by the total number of units available. Perpetual Inventory Benefits for eCommerce Businesses in 2023 Shortens the Time Needed for Accounting Procedures During the preparation of financial books, usually at the end of the year, the value of the closing stock needs to be known. With a perpetual inventory system, this information is always on-hand as it reflects any changes to the inventory in real-time, which helps to speed up accounting procedures. Requires Less Investment in Materials Since perpetual inventory systems keep track of every purchase and sale of inventory, whether it is raw materials, finished goods or work-in-progress inventory or products, businesses can get a clear idea of the what amounts they are spending on what materials and it can help them optimize the quantities that are needed and thus, reduce inventory costs. Helps in Restocking A business will be able to know if inventory of a certain product is running low and will be able to reorder items before it runs out completely. This aids in the continuous fulfillment of customer orders and keeps the business running smoothly and effectively. Optimizes the Use of Resources Since perpetual inventory gives us a clear idea of what the expenses and incomes of the business are and where they are entering and exiting from, the business can optimize every process that involves working capital, whether it is labor working on a particular task, the purchase of materials, the transport of goods, etc. Helps Provide a Clear Picture Perpetual inventory systems update inventory levels in real-time. This means that you will always have an idea of which products are doing well and which aren’t. In addition, you’ll get access to more granular data such as seasonal demand for products, what causes spikes and dips in demand and much more. Conclusion: How InventoryLogIQ Can Help You Monitor Your Perpetual Inventory A perpetual inventory system provides more accurate information because ongoing recording and prompt verification of inventory are done. Perpetual inventory also enables financial statements to be prepared quickly and accurately. A Perpetual inventory system is best suited for big enterprises, while a periodic inventory system is suitable for small businesses. Perpetual inventory is the preferred method for tracking inventory with accurate results on an ongoing basis. If you need help with acquiring a perpetual inventory system for your business and any other inventory-related requirements, InventoryLogIQ can be a good option for you. InventoryLogIQ has a custom OMS that aids in providing real-time updates of your inventory levels across multiple warehouses. In addition, our platform can integrate with most big eCommerce marketplaces to ensure that all your inventory management and order fulfillment happens in one centralized location. We also give you deep insights into the inner workings of your inventory and order-related data so that you can plan ahead. Perpetual Inventory System: FAQs What is a perpetual inventory system?It is a program designed to estimate your inventory without any disruptions. A perpetual inventory system relies on electronic records rather than physical ones. It generally starts from the baseline with a physical count and details get updated as and when purchases are made and shipments come inward or move outwards. Why is it important to have a perpetual inventory system?A perpetual inventory system instantly tracks sales and inventory levels for individual items, which helps to prevent stock-outs. Perpetual inventory systems monitor the availability of stock at all times and alerts you whenever a product is out of stock or is getting depleted. Why is a perpetual inventory system most suited for eCommerce businesses?With a high degree of record accuracy, inventory reordering can be conducted with confidence and it ensures stable delivery timelines for your customers. The perpetual inventory system tracks every inventory transaction in real-time; the resulting inventory records are highly accurate and reliable. This may improve customer satisfaction and bolster sales. It also gives business owners a more accurate understanding of customer preferences and centralizes the inventory management system for multiple locations.  What are the advantages of the perpetual inventory system over the periodic inventory system? A Perpetual inventory system captures and tracks updates to inventory and costs of sales throughout the year. A perpetual inventory system is designed to update and record the inventory account automatically whenever a sale or purchase takes place. Each sale or purchase that happens immediately upon sale or purchase is recognized. A periodic inventory system updates the inventory account at certain scheduled times or at the end of an operating cycle. The update and recognition could occur at the end of the month, quarter or year. There is a gap between the sale or purchase of inventory and when the inventory activity is recognized. A faster inventory system enables companies to react faster to the supply and demand of the market.  What kind of business is ideally suited for a perpetual inventory system?Typically a large enterprise with large amounts of inventory, sales volumes and multiple retail outlets need perpetual inventory systems. The scope for marginal errors with the periodic system is higher when compared to the perpetual system because it is based on a physical counting system. Many leading eCommerce enterprises use a perpetual inventory system for tracking stocks at their stores and warehouses such as Amazon, Walmart, Marks & Spencer and others.

March 23, 2023