Shrinkage (accounting)
In financial accounting the term inventory shrinkage (sometimes truncated to shrink) is the loss of products
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...

 between point of manufacture
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...

 or purchase from supplier and point of sale
Point of sale
Point of sale or checkout is the location where a transaction occurs...

. The term shrink relates to the difference in the amount of margin or profit
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

 a retailer can obtain. If the amount of shrink is large, then profits go down which results in increased costs to the consumer to meet the needs of the retailer. The total shrink percentage of the retail industry in the United States was 1.52% of sales in 2008 according to the University of Florida's, National Retail Security Survey.. In Europe shrinkage was about 1.27% of sales and the same figure for Asia Pacific was 1.20% according to the Global Retail Theft Barometer 2008..

Causes of shrinkage

An estimated 44% of shrinkage in 2008 was due to employee theft
In common usage, theft is the illegal taking of another person's property without that person's permission or consent. The word is also used as an informal shorthand term for some crimes against property, such as burglary, embezzlement, larceny, looting, robbery, shoplifting and fraud...

, totaling over $15.9 billion. Another 35% was due to shoplifting
Shoplifting is theft of goods from a retail establishment. It is one of the most common property crimes dealt with by police and courts....

, totaling over $12.7 billion. The prevention of this type of shrinkage is one reason for security guard
Security guard
A security guard is a person who is paid to protect property, assets, or people. Security guards are usually privately and formally employed personnel...

s, cameras
IP camera
An Internet protocol camera, or IP camera, is a type of digital video camera commonly employed for surveillance, and which unlike analog closed circuit television cameras can send and receive data via a computer network and the Internet...

 and security tags. Other causes of shrinkage include:
  • Damage in transit or in the store.
  • Administrative errors such as shipping errors, warehouse discrepancies, and misplaced goods.
  • Cashier or price-check errors in the customer's favour.
  • Vendor fraud.
  • Perishable goods not sold within their shelf life
    Shelf life
    Shelf life is the length of time that food, drink, medicine, chemicals, and many other perishable items are given before they are considered unsuitable for sale, use, or consumption...

  • Paperwork errors.

Loss at the POS terminal

Shrinkage in retail that is caused by employee actions typically occurs at the Point of sale
Point of sale
Point of sale or checkout is the location where a transaction occurs...

 (POS) terminal. There are different ways to manipulate a POS system, such as a cashier giving customers unauthorized discounts, creating fraudulent returns, manually entering values in the system or making a no-sale, which means that the cashier opens the cash counter without registering a sale. These transactions that differ from normal transactions are called POS exceptions. Traditionally POS fraud is fought by surveillance staff monitoring a POS terminal or by manually searching in surveillance video recordings. Modern POS systems can have automatic alerts when specific exceptions are detected. Also exception reports and listings based on employees, refunds, terminals etc are possible to detect with modern systems. Modern networked based POS systems can also include network video to POS exception listings, giving quick access to detailed information of what has happened.

In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, the National Retail Security Survey is published annually as part of the Security Research Project at the University of Florida
University of Florida
The University of Florida is an American public land-grant, sea-grant, and space-grant research university located on a campus in Gainesville, Florida. The university traces its historical origins to 1853, and has operated continuously on its present Gainesville campus since September 1906...

. The Security Research Project endeavors to study various elements of workplace related crime and deviance with a special emphasis on the retail industry. Since theft is hidden, no study can be completely accurate. Employees are easier to monitor than customers, which may artificially inflate the percentage attributed to employee theft.

One effective measure to prevent against loss due to shrinkage is to implement an inventory management application offered by a third party vendor. These applications allow for better control over inventory and will alert companies of the source of the inventory shrinkage. A more accurate picture of inventory also provides significant cost savings for companies as costs associated with stock-outs or excess inventory are eliminated.

Calculating shrinkage figures can be accomplished through the following formulas:

Beginning Inventory + Purchases - (Sales + Adjustments) = Booked (Invoiced) Inventory

Booked Inventory - Physical Counted Inventory = Shrinkage

Shrinkage/Total Sales x 100 = Shrinkage Percent
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