How to Reduce Shrinkage: Loss Prevention for Small Businesses

Shrinkage—or loss of inventory due to employee theft, error, shoplifting, or fraud—is an issue no small business owner can afford to ignore.

In fact, a 2018 survey from The National Retail Federation found that shrinkage accounts for 1.33 percent of retail losses every year. It might not sound like much, but all together, it accounts for a whopping 46.8 billion dollar loss across the retail industry annually. 

These statistics aren’t meant to scare you, but to shed light on an issue that’s been plaguing small business owners for decades. Here are some simple steps you can take to prevent retail inventory shrinkage from putting a dent in your business’s bottom line.

1. Hire carefully

There’s no getting around it—the idea of retail work doesn’t shine with the same luster it did in its glory years. Once lauded as a highly sought-after profession, retail work has become dogged by tales of long hours, rude customers, and low wages. 

Yet with 4.6 million Americans working in retail sales, the business is not as much of a bust as some would lead us to believe. But a job market that’s on the upswing also means job-seekers can afford to be choosier, which is one of the reasons why there is high employee turnover in the retail industry. 

This alone can make it tough to find trustworthy and capable staff. It can be hard to carve out the time to do background checks and make reference calls. But the peace of mind that comes with knowing you’re entrusting your life’s work to capable workers may very well save you money on training and lost customers over time. 

While you can’t insure your employees will never catch a customer having a bad day, you can make your small business one your employees are proud to be a part of. 

Forbes reports that 70 percent of retail employees are “actively disengaged,” which is a huge problem in an industry where your floor staff’s product knowledge and enthusiasm can make or break the customer experience. 

Invest in training and make sure your employees are as passionate about your small business as you are, so they will want to stick around for the long haul–– reducing the need for short-term or part-time employees who don’t have time to familiarize themselves with your inventory.

2. Crack down on theft

Even if you’re sure you’ve got the right people, you still need to be on the lookout for internal theft– especially with newer workers who haven’t been on your payroll very long. American businesses lose an estimated 5 percent of their annual revenue to employee theft each year, and Forbes contributor Ivy Walker says small businesses are most at-risk.

“Small business owners often have a false sense of security about their insider threat risk,” she says, mostly because they feel they know their employees well enough to give them their full trust.

Establishing a clear no-tolerance policy (and putting it in writing for all your workers) is a solid way to gently inform new staff that employee theft is constantly on your radar.

Shoplifting and organized retail crime are also a major culprit of retail shrink due to external theft, so place security cameras in high traffic areas—like the cash register, entrance and exit, and outside of fitting rooms. 

Make them clearly visible, and alert shoppers they are being monitored with easy-to-spot signage. Even something as simple as a mirror can help thwart a would-be customer theft. It’s easy to install and provides a fairly cheap and effective way to let customers know they’re being “watched”—making them less likely to steal. 

3. Rethink your store layout

An aesthetically-pleasing store layout seems like small business 101, and it’s a well-known fact that an eye-catching window display and product layout can help drum up business and keep people coming back. What you may not know, however, is that the layout of your store can play a key role in loss prevention.

A free-flow layout is ideal for if you are aiming for an upscale feel with maximum visibility to prevent shrinkage. A free-flow layout can also create open sight lines throughout your shop—drawing customers’ eyes to specialty items and displays while allowing your workers to discreetly keep an eye on their surroundings.

The placement of your checkout is also critical in preventing retail theft. Smaller, less expensive items are easy to steal and can be a costly way to lose inventory. Placing those impulse items by the counter makes them tougher to swipe.

Even the position of the cash register can deter potential thieves. A checkout near your store’s entrance can reduce theft and provide a straight line-of-sight to the door for employees.

4. Be proactive about fraud prevention

For better or for worse, paying with cash is quickly becoming a thing of the past. A 2018 survey by payment processor TYS found that a mere 14 percent of consumers preferred making their purchases with cash, while debit cards are actually quickly becoming the preferred method of payment for the average convenience-seeking shopper.

With more payments being processed virtually, it’s becoming easier than ever for scammers to get away with millions a year in retail theft. The idea of monitoring your customers’ every virtual move may seem daunting—especially on top of all the other duties a small business owner shoulders daily. Thankfully, there are companies that exist solely to take that burden off of your shoulders.

Since there are multiple types of retail fraud to be aware of, you should train your staff to be vigilant about fraud-prevention practices. It’s also important to encourage and incentivize them to speak up if they see something out of the ordinary. Payment Depot argues that “empowering (your associates) to use the correct practices and recognize potential fraud can prevent fraud from the beginning and put an owner’s mind at ease knowing the staff has been trained well.”

5. Avoid costly administrative errors

Let’s face it: Human error is pretty much unavoidable. Since the vast majority of retailers have transitioned from paper to digital record-keeping, something as simple as a typo or a misplaced decimal point can lead to a costly mistake.

Clerical and stock-keeping errors are a common culprit of retail shrinkage. Thankfully, it’s also one of the easiest to avoid. Pairing a solid personal inventory management system with a trusted point-of-sale system is a good way to combat shrink and stock-mismanagement by catching any inconsistencies before they wreak havoc on your business’s budget.

>No matter what type of business you’re in, integrating a POS system will help make life easier for you and for your employees by catching inventory errors and data inconsistencies that would have otherwise gone unnoticed until it was too late.

Bringing it all together

No amount of shrinkage is a good goal, and in an ideal world, the loss prevention steps above would lead to a zero percent loss for all businesses across the board. The National Retail Federation found signs in its 2018 annual survey that shrinkage rates are slowly declining–– proving that retail loss prevention tactics like stricter employee screenings and better attention to detail in payment processing and returns are starting to show returns. 

While it’s true that criminals are becoming increasingly savvy and digital discrepancies can make you more susceptible to inconsistent data and fraud, a virtually shrink-free business could very well be in your future, provided that you hire carefully and use the right tools.