What Is Shrink, And How Should We Track It? [Talkin’ Finance With Steve Bailey]

Steve Bailey
Steve Bailey

Do you have a financial-related question about your garden center? Send it to financial expert Steve Bailey at [email protected].

Question: What is shrink, and how should we track it?
— Rex Andersen, Town & Country Gardens, Idaho

Answer: Shrink is missing inventory, either in the form of what I classify as known shrink (a broken bottle or busted bag of soil) or unknown shrink. Simply defined, shrink is the difference in the value of inventory between the dollars of inventory that are supposed to be on hand and the value of inventory actually on hand. If it’s not there, it’s missing inventory known as shrink.

Known shrink should be recorded through an inventory adjustment in your POS that is built into the system for that purpose and that purpose only. Do not let the inventory adjustment feature become a crutch for moving inventory to another division or entity. If it is used for such purposes, it is very difficult to sort out known shrink from transfers, etc.

Make sure that known shrink shows on the margin report your buyers are using for managing their departments and categories. If it is not, either contact your POS supplier and ask that it be changed to accommodate this feature, or enlist the aid of a fictitious customer named “Mr. Dump” or something similar that would never be used by a true customer. Charging known shrink through this customer at a 100 percent discount reduces the inventory on hand and is included on the margin report with no expectation of cash in the drawer for the sale at the end of the day.

Access to using this customer should be restricted to management only, as it could become a shrink issue in itself if misused. Discuss this method of inventory adjustment with your CPA to ensure there are no tax implications in your area/state by using such a customer.

Unknown shrink is the difference between inventory on hand and the amount indicated in your POS system. After isolating and eliminating all internal issues that may be causing the difference, such as transfers not accomplished, the amount of unknown shrink is basically shoplifting or theft. The amount of missing inventory is an eye-opener, and if large enough, will certainly justify security measures to reduce the amount to a more palatable level.

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