A Blog for Small Business Owners & Operators

Reducing Your Average Daily Loss

Posted by LP Innovations

Nov 10, 2011 11:07:00 AM

As a business owner or operator you have a business plan that outlines your strategy for sales and operations. You measure your sales and analyze how much you make daily, weekly monthly and annually.

Do you do the same for your inventory loss?

Most businesses gauge their inventory loss when they conduct a physical inventory and calculate their "shrink percentage" against sales. Food providers will do the same but calculate the variance of food costs against sales to reach a percentage.

describe the imageEither way, these percentages are represented by a very low numerical statistic, which may or may not represent a more detailed record of loss.

What if you were to drill down your annual loss to determine your average daily loss by location? Would it provide a more descriptive account of your actual loss?
 
Example:

You have a single location with a 1% inventory loss against sales of $750,000.00. The estimated annual loss would be $7,500.00. What would that daily loss be? 

 
Let's say that with a single retail location you have a 1% inventory loss against your sales of $750,000.00. The estimated annual loss would be $7,500.00 Divide this number by 365 days of business (or how many days you are open), and you can calculate the estimated average daily loss of each location.

Average Daily Loss Formula:
(Annual Sales x Shrink Percentage / # of Retail Locations) / # of Operating Days in a Year = Average Daily Loss per Location


In this example, the Average Daily Loss would be $20.55 for one location! Depending on your average ticket per item that loss could be the retail value of one, two or more items sold.

This calculated loss is a direct loss to your bottom line profits. Understanding that some retailers may not lose that amount daily, others may lose more. The bottom line is how many items would you need to sell to make up for this daily lost profit? The answer depends on the costs of goods and margin, but is certainly in multiples. And that is only to make up for the daily loss!
 

Focus on the education and awareness of your employees. Many losses are not caused by theft, but by employee mistakes. Reducing a single mistake could eliminate an entire daily loss for that location.

Quickly investigate and resolve detected issues involving theft. Wishing it away or thinking a dishonest employee will stop stealing doesn't work. Uninvestigated thefts or prolonged investigations will only increase the opportunity for loss, and may decrease morale enough to include other employees engaging in more theft.

Have an established audit process in place to check on procedures. Conduct regular audits or checklists to check compliance on various policies, procedures and processes. Non-compliance or lack of procedures will almost always lead to loss.

Always think Prevention. Develop the mindset to always think how you can help the company and its associates prevent loss. Situations will occur, however, always focusing your program on prevention and deterrence will result in greater reductions of loss.

Topics: shrink awareness, store operations