Inventory Shrinkage Costs a Mystery? 3 Areas to Investigate Right Now

warehouse shelves with boxes

Trying to grow the value of your business is hard. It gets even harder when you’re leaking dollars you don’t even know about. The culprit? Inventory shrinkage. Many MSPs and managed technology providers have no idea what this is, let alone how much it’s costing their business. One day you may decide to sell your company and shrinkage could end up costing you dollars as well as embarrassment when asked about what the numbers look like. Today, we’ll help make sure those things don’t happen.

What is inventory shrinkage?

Put simply, inventory shrinkage is the amount of inventory you think you have vs. the amount of inventory you actually have. You will often have inventory in your own warehouse, at the customer location, and moving around in trucks driven by your service technicians. All of this inventory must be accounted for and audited frequently in order to get a handle on your shrinkage amount and percentage so you can start taking action to fix it.

How do you calculate inventory shrinkage?

The standard formula for Inventory shrinkage is as follows:

inventory shrinkage formula

An example for you:

$50,000 in accounting parts inventory – $49,200 physical inventory count/$50,000 equals .016 or 1.6%

How much inventory shrinkage is too much?

Every single dollar you lose to inventory shrinkage is a dollar too much, especially if you aren’t actively accounting and tracking for it. The good news is there are a few common areas you can start getting a grasp on straight away. As an MSP or managed technology provider, here are the 3 most common:

Employee theft

The sad truth is, the more people who have access to your inventory, the higher the odds that some of it going missing due to theft. It could be your own staff, your customers’ staff, or even 3rd parties you couldn’t possibly be aware of. Don’t think so? Do a Google search for “employee stealing inventory and selling on eBay” and you’ll get over 1.2 million results. I personally helped a company discover a similar problem for a service technician who was stealing and selling printer parts and toner cartridges on eBay.We would have never discovered it but for doing an inventory count as part of my assessment. It happens way more than most companies realize.

Inventory obsolescence

What is inventory obsolescence and does it count as shrinkage? It’s when you have inventory in stock that can no longer be used, and according to the Accounting Coach, it should be counted towards inventory shrinkage. Obviously, you should check with your accountant to see if this is true for your local state or service area. This is a common problem for those managing technology, as the technology used by companies often advances or changes so quickly. If you have a bunch of leftover DDR1 and DDR2 RAM in inventory you know exactly what I’m talking about here, and that’s just one example. Hard drives, cabling, and any number of maintenance items should all be accounted for and tallied in your shrinkage numbers if applicable in the state you do business.

Clerical errors

”To err is human”, right? If you have a person manually managing inventory, this creates an opportunity for shrinkage based entirely on mistakes being made. The more places you keep inventory, the higher the risk of manual errors. It’s not just a risk from your own people, but from the people who supply your inventory. Lost paperwork, mistakes in data entry, and simply forgetting to account for things all add up in a hurry. Investing in a good inventory management platform should be an obvious choice. Check out this eGuide if you haven’t taken care of this already.

How do you reduce inventory shrinkage?

Ahhhhh, the $1,000,000 question! Or the $100,000 or $10,000 dollar question, depending on the size of your company. No matter your size, these simple tips will help you to reduce shrinkage and get some of those dollars back into your business:

Use more drop-ship options

Check with your suppliers to see if they offer drop shipping. Many have same-day in metropolitan areas and most offer overnight options. Suppliers often charge a premium for drop –shipping, but once you work out the math, you’ll usually find that you’re still ahead. This could help reduce shrinkage in a couple of important ways. First, nothing on-site, nothing to grow legs. Second, it will prevent aging inventory on shelves that risks becoming dead stock.

Conduct more audits

Nobody likes doing inventory checks, but it is one of the best ways to keep your employees and your customers’ employees on notice. Have you ever heard the expression that car door locks keep honest people honest? Same principle. Also, more frequent audits will help you to remove inventory that is no longer needed so you can use it someplace else.

Automate inventory tracking

The less manual intervention, the more likely inventory will be tracked and accounted for the way it should be. When an item moves from your main warehouse into a van and then to a customer location, leading business management platforms will increase accuracy and dramatically decrease the time it takes to track and account for moving stock.

If you pay more attention to the 3 invisible inventory shrinkage items above, you’ll start adding more value to your business. Value that will come back to you should you decide to sell one day. You’ve worked hard to grow and run your managed technology practice–you deserve to keep every dollar you can!

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