Can your retail business absorb a yearly profit loss of two percent? This is the average hit retailers feel due to inventory loss, also called shrinkage. It’s a big problem.

According to the National Retail Security Survey, in 2016, shrinkage issues cost retailers more than $49 billion. To put that into perspective, consider this math. If your retail store made one million dollars in sales with 50 percent gross margins, a two percent shrinkage cost would reduce your bottom line by $10,000. That’s a lot of money down the drain. 

So what are the leading sources of inventory shrinkage?

Number one is shoplifting. “Stealing by shoppers continues to cost retailers billions of dollars every year. In 2014, it accounted for 38 percent of retailers' shrinkage.”

Number two is employee theft, which accounts for nearly 34.5 percent of inventory shrinkage.

Then there are administrative errors. Nearly 16 percent of shrinkage comes from human mistakes and poor accounting methods.

Seven percent of shrinkage is caused by vendor fraud. For example, you may be paying for a certain number of items, but the vendor fails to deliver and stock an exact count.

Then there is the “mystery” six percent of losses that can’t be accounted for. According to the National Retail Security Survey, this is the “smallest and perhaps most frustrating segment of retail shrinkage.”

To minimize shrinkage, you need to analyze these key areas and create a strategy. Upping surveillance methods could catch thieves in their tracks, for example.

As for administrative and other human errors, inventory management software can help tighten up operations. It’s an investment that pays for itself just in providing the ability to track inventory and provide accurate reporting that will minimize surprises when it’s time to audit and assess profitability.