How to reduce stock shrinkage

Shrinkage is the stock that disappears between what your records show and what is physically there. It shows up when you count. business.gov.au says a stocktake helps you spot missing or stolen items early and find items that are broken, out of date or unsaleable, and its stocktake guidance lists detecting theft and gaps in stock levels among the benefits of a count.

The causes fall into a few groups:

• theft, by customers, staff or others with access
• damage in handling or storage, and products that spoil or pass their use-by date
• recording errors, such as a sale not entered, a wrong item code or a return put back on the shelf without being recorded
• deliveries that arrived short but were entered in full.

A count can also come in above the records. An overage isn't shrinkage, but it points to the same kind of recording error, so investigate it the same way.

After each stocktake, value the unexplained shortfall on each item at its cost, then total it by category. Tracking the same figures count after count shows whether shrinkage is growing and where it is concentrated.

Confectionery lost the most units, but phone chargers lost the most value: few items, each costly and easy to pocket. Where the two lists differ, the value list usually tells you where to act first.

Before changing anything, look for a pattern in the shortfalls:

• by location: one storeroom, shelf or van
• by item: small, valuable or easily resold goods
• by supplier: shortfalls that start soon after deliveries from one supplier
• by time: losses concentrated in particular shifts or busy periods
• by person: adjustments, voided sales or refunds that keep involving the same login.

Up-to-date records make this possible. business.gov.au notes that capturing every sale and return helps you catch issues such as errors or faulty products as they happen.

1. Count each delivery against the delivery docket before signing for it.
2. Compare the docket with your purchase order.
3. Note any shortage or damage on the docket and tell the supplier straight away.
4. Enter the quantity actually received, not the quantity ordered.
5. Make sure the bill you pay matches what arrived.

A short delivery entered in full looks exactly like theft at the next count, so checking deliveries closes off a common source of unexplained losses.

Stock leaves in more ways than a sale. Give each of these its own reason code and record it when it happens:

• damaged or broken items, with who found them
• expired or spoiled items thrown out
• samples given away, display items withdrawn from sale and items consumed in the business
• stock the owner or staff take for their own use
• goods returned to suppliers.

Once these are recorded, the shortfall left at a count is the part you genuinely can't explain. How damaged, used or missing stock is treated in your accounts is a question for your accountant.

Some shrinkage is really missing sales. The goods left, but the sale was never rung up, or a refund was processed for goods that never came back. The ATO's record-keeping tips suggest keeping accurate records of all cash and electronic transactions and reconciling cash and EFTPOS sales regularly, daily, weekly or monthly depending on the business.

• Count the till at each close and compare it with the opening float plus cash sales and other cash received, less cash refunds, cash out, cash removed and other authorised payments. Leave card sales out of the expected cash total.
• Require a second person, or a manager's approval, for refunds and voided sales.
• Review refunds and voids each week for patterns.
• Bank cash regularly. business.gov.au points out that cash is more exposed to theft than payments that land directly in the bank.

• Keep small, valuable items behind the counter or in a locked display.
• Limit who can enter the storeroom.
• Where you can, have different people receive stock, adjust stock records and approve adjustments.
• Count high-risk categories more often than the rest, between full stocktakes, and vary when you do it.

Delegating the counting and the paperwork doesn't move the responsibility: the ATO holds the owner primarily accountable for the business's records. Reviewing stock adjustments yourself, even briefly, is part of that oversight.