From a management or owner perspective here are just a few ways to combat and reduce shrinkage from these two sources:
But all this won’t totally stop shrinkage because there is another type of thief – the owner!
When stock leaves the store, but is not invoiced or paid for, in financial management and accounting terms it is shrinkage, just the same as if the stock had been taken by customers or staff.
The argument from owners of stores, who may be using stock to finish off their bach (for example) is: “It’s my stock and I can do whatever I like with it!”
Technically that is correct but there are some legal and management ramifications to this attitude which I will spell out below.
Firstly, why is it not a good idea just to take stock for the owner’s private use?
SETTING A PRECEDENT – NOT AN EXAMPLE
Can I ask this of owners, when there are discrepancies in stock levels, what is the point of banging the drum, undertaking an analysis, training staff (sometimes a lecture) when as the leader you should be setting an example and not a precedent?
You are sending a mixed message: that it is OK for you or members of the family to come in and simply pick up say a basic drill and drive out with no record or payment. Some disgruntled staff would view that action like this: “Well if it is all right for them, then it’s fine for me”.
IT’S INCOME AND IT’S TAXABLE
Be aware that the IRD treats this area seriously because it considers the value of stock taken without payment as assessable income and is subject therefore to tax at your personal marginal rate!
That is, it needs to be included in your personal tax return as income, like a salary.
A substantial disappearance of stock could also put your store outside the parameters for a hardware store based on IRD Benchmarks and prompt an Audit…
ANALYSIS OF RESULTS BY OUTSIDE PARTIES
When the stock level is lower than it should be, the Cost of Sales increases. An increase in the Cost of Sales against a given sales level reduces Gross Profit, Gross Profit Margin and, ultimately, Net Profit.
This puts the business in a negative light, not only for financiers when it comes to yearly reviews, but also when you come to sell the business.
Using my method of valuing goodwill (the super profit method – for more information visits my web site), for every $1 of super profit you generate $4 goodwill.
Conversely, for every $1 of super profit lost, you lose $4 in goodwill.
To use a simple analogy, say the drill taken costs $25. Using my formula, its actual cost is a $100 reduction in profit.
NOT ILLEGAL BUT IT HAS A REAL EFFECT
A store owner wants to do an analysis of why his Gross Profit Margin is so low and take a really good look at the store layout, because he is certain that stock is walking out the door.
I spend a day looking at ways and means of getting stock out and it beats me as the stock variance is running very high.
But a subsequent visit to the owner’s property out of town shows me where the stock ended up – in his lovely property’s decking, sliding doors, BBQ, outdoor lighting etc.
In fact some stock never made it into the store but was delivered direct to the property and billed to the store.
I know the cry will be: “It is my stock and I will do whatever I like with it”.
While you won’t hear any argument from me, just be aware that there are ramifications to this outlook.
Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au