Last Updated:
June 16, 2022

Is shrinkage really that big of a deal?

Every bar in the world experiences shrinkage and it’s a hard factor to completely eliminate. So, is it worth even trying?
Is shrinkage really that big of a deal?
By
Angelo Esposito
A preview of the downloadble item
Free resource

WISK's Par Inventory Template

For restaurant owners who want to reduce ordering more than necessary and start based on their par levels.

Download your par sheet
DISCLAIMER: Please note that this information is for informational purposes only and should not be considered as legal, accounting, tax, HR, or other professional advice. You're responsible to comply with all applicable laws in your state. Contact your attorney or other relevant advisor for advice specific to your circumstances.
Table of Contents

Let's face it– every bar in the world experiences shrinkage and it's a hard factor to completely reduce shrinkage. So, is it worth even trying? Or do the bar and restaurant managers of the world just accept shrinkage as their fate and move on.

In short, yes. Shrinkage does matter. In fact, it can be responsible for losses as much as 25 percent of your bottom line . So it's not exactly small change.

While reducing shrinkage might be tough for most bars and restaurants, there are a few relatively easy procedures you can implement to make an immediate difference and make more money. Read on to reduce the amount of product wasted in your bar and how to increase profits.

What Is inventory shrinkage?

Before we can get into ways to reduce shrinkage, it's important to understand exactly what inventory shrinkage is. Shrinkage refers to the loss of inventory that can be attributed to factors such as spilled liquor, stolen food over-pouring, theft, or even breakage in bars and restaurants.

In other words, shrinkage is anything that takes away from the amount of product you have on hand– and it all comes out of the bottom line of your business. That is why reducing shrinkage as much as feasible is critical.

So how do you know if you're experiencing inventory shrinkage? The easiest way is to compare your beginning inventory levels with your ending inventory levels. If there's a discrepancy, that's an indication that you're losing money somewhere along the way. Of course, it's not always that cut and dry. The shrinkage rate is also an important metric that you want to keep track of. Ideally, you want to reduce shrinkage as low as possible. But in reality, the industry standard for bars and restaurants experience a shrinkage rate up to 20 percent.

Understanding bar shrinkage

There are two types of shrinkage bars and bar owners need to be aware of: physical and financial.

Physical shrinkage

Physical shrinkage is the result of product being wasted, stolen, or broken. This is the type of shrinkage that bars can have the most control over.

Financial shrinkage

Financial shrinkage is a little more complicated. It occurs when bar employees don't charge customers the actual cost for all the products they consume. For example, if a bartender gives away free drinks or comps meals without authorization, that's financial shrinkage.

There are a few costs associated with bar shrinkage. The most obvious is the financial cost, which can be significant. But there are other costs for your business to consider as well, including:

  • The actual cost of lost product
  • The cost of employee theft
  • The cost of supplier fraud
  • The cost of management error
  • The cost of consumer theft

When it comes to bar shrinkage, it's important for bar and restaurant owners to understand the different types of costs they can incur and how it impacts the revenue and profits.

Remember, there are two main types: physical and financial. Physical shrinkage is the result of wasted, stolen, or broken product. Financial shrinkage occurs when employees don't charge customers the actual cost for all the products they consume. Ideally, you want to avoid both types of shrinkage in your bar. But we understand that's not always possible. So let's take a closer look at some ways you can lower physical inventory shrinkage in your company.

How does bar inventory shrinkage occur?

There are a number of ways bar inventory can shrinkage can occur, but the most common are:

  • Spilled drinks
  • Stolen food
  • Over-pouring
  • Breakage
  • Theft

Some of these factors– like spilled drinks or broken glasses– are inevitable. But others, like theft and over-pouring, can be prevented with proper bar management procedures.

What Isn’t Considered Shrinkage?

It’s important to note that not everything that bar owners might consider shrinkage actually falls under the definition. For example, if a keg of beer goes bad and needs to be thrown out, that isn’t considered shrinkage. The same goes for food that expires and has to be thrown away. Same for anything that is related to product usage.

Now that we’ve got a better understanding of what bar inventory shrinkage is– and what it isn’t– let’s take a look at how shrinkage can actually impact your bottom line of your company.

Is Shrinkage Really that Big of a Deal?

In short, yes. Shrinkage does matter. In fact, it can be responsible for losses as much as 25 percent of your bottom line. So it’s not exactly small change in your revenue. In average, restaurants and bars lose 20% of their profits and revenue due to shrinkage.

How Does Shrinkage Impact My Business?

There are a number of ways that inventory shrinkage can impact your bar, but the two most common are:

  • Lower profits
  • Difficulty meeting customer demand

Inventory shrinkage directly impacts your bar's bottom line. The more product you lose, the less profit you'll see. In fact, for every 1 percent increase in shrinkage, profits can drop by as much as 2.5 percent. That's significant!

What’s more, inventory shrinkage can also make it difficult to meet a certain level of customer demand. If you're regularly losing product due to shrinkage, you may not have enough inventory on hand to meet the needs of your customers. This can lead to lost sales and a decline in profits. While shrinkage might be tough to address, there are a few relatively easy procedures you can implement to make an immediate difference and maximize profits. We'll look at various causes of shrinkage before we discuss how to prevent it.

Main Causes of Shrinkage

There are a number of factors that can contribute to bar inventory shrinkage, but the most common are:

Employee theft

One of the most common– and difficult to prevent– causes of bar inventory shrinkage is employee theft. According to the National Restaurant Association , employee theft accounts for 36 percent of all restaurant shrinkage.

Theft can come in many forms, from bartenders over-pouring drinks to servers taking food home without paying for it. And it can be difficult to spot– especially if you don't have a system in place to track your inventory levels.

Loss of product

Another significant cause of bar inventory shrinkage is simply loss of product. This can occur for a number of reasons, from spilled drinks to broken glasses. And while some loss is inevitable, there are steps you can take to prevent inventory shrinkage.

Supplier fraud

Supplier fraud is another– albeit less common– cause of restaurant inventory shrinkage. This occurs when a supplier bills your account for more product than you actually receive. It can be difficult to spot, but there are a few red flags to look out for, including:

  • Inconsistent invoices in your account
  • Unexpected price increases in your paid bills
  • Changes in packaging
  • Product that doesn't meet quality standards

If you suspect your supplier might be committing fraud with your account, it's important to take action quickly. Not only will this help prevent shrinkage, but it can also protect you from legal penalties.

Management errors

Another common cause of bar inventory shrinkage is management error. This human error can occur when bar managers make mistakes when ordering or tracking inventory. While it's not always possible to prevent this type of human error, having a systems and processes in place to track inventory can help to minimize them.

Consumer theft

Consumer theft– also known as "walkouts"– is another common cause of bar inventory shrinkage. This occurs when customers take products without paying for them. The most common items stolen are:

  • Alcohol
  • Glassware
  • Food

To prevent consumer theft, it's important to keep an eye on high-value items and keep them secure when not in use.

Unknown causes

In some cases, actual inventory shrinkage may be caused by an unknown factor. This can make it difficult to prevent, but there are a few steps you can take to minimize the risk.

Calculating Shrinkage

Once you've identified the causes of bar inventory shrinkage, it's time to start tracking it and create a process to reduce it.. There are a number of ways to calculate restaurant inventory shrinkage, but the most common is to use the inventory shrinkage formula.

What is the inventory shrinkage formula

The inventory shrinkage formula is:

Book Value - Current Inventory Value

This formula will help you to determine how much product you've lost– and, by extension, how much profit you've lost– over a given period of time. To use the inventory shrinkage formula, you'll need to know two things:

Your bar's book value

This is the value of your bar's inventory at the beginning of the period you're measuring.

Your bar's current inventory value:

This is the value of your bar's inventory at the end of the period you're measuring. Once you have these two values, simply subtract the current inventory value from the book value. The resulting number is your bar's inventory shrinkage for that period.

Example:

Let's say that at the beginning of the month, your bar has $23,000 worth of inventory based on your inventory. At the end of the month, you conduct a physical inventory and find that you have $18,500 worth of inventory. To calculate your bar's inventory shrinkage for the month, simply subtract the current inventory value from the book value:

$23,000 - $18,500 = $4,500

This means that your bar lost $4,500 worth of product– and, by extension, $4,500 in profit– over the course of the month.

What is inventory shrinkage rate percentage

The inventory shrinkage rate percentage formula is:

Shrinkage / Book Value

Let's calculate the figures in the example given above: $4,500 per 23,000 meals = 0.1956.

This means that your bar's inventory shrinkage rate percentage example for the month was 19.56%. This number can be helpful in identifying trends over time, but it's important to keep in mind that it doesn't give you the full picture. To get a more accurate picture of your bar's inventory shrinkage and profitability, it's important to look at both the absolute value and the percentage.

How to reduce shrinkage and maximize profits

Implement measurement practices for your inventory items

Measure, measure, measure. Make sure your entire staff uses jiggers when making a drink and establish a clear amount of alcohol needed for every product sold on your menu. The same goes for pouring wine and draft beer, always measure a standard amount for each drink sold. Beyond creating a process to measure the quantity of alcohol in each drink sold, be diligent when you measure the bottles you have on hand with an actual scale , not just by eyeballing. Knowing your exact inventory counts not only increases accuracy with ordering and pouring, it helps discourage employee theft.

Regular Physical Counts of your actual inventory records

In order to keep a close eye on your recorded inventory counts and catch errors, you should be taking inventory records of your bar inventory on a regular basis. This means going through each bottle and verifying that the recorded inventory amount you have on hand matches your sitting inventory in your bar management software. Doing physical counts regularly will help you catch any discrepancies early on and prevent them from becoming bigger issues down the road.

Automate inventory management

If you're still using pen and paper to keep track of your inventory, it's time to make the switch to a restaurant management software. A good restaurant management software will make it easy to keep track of your inventory, so you can quickly catch any discrepancies.

WISK restaurant management software is a great option that can help you save time and money by making your inventory as easy as scan, weigh, and done. You can also see inventory in real-time with our POS integrations.

Barcode your food and bottle inventory (and shelves!)

Barcoding your items is an effective way to keep track of your inventory and prevent shrinkage. By barcoding each bottle, you can quickly and easily scan them in and out of your restaurant management software(like WISK), ensuring that you always have an accurate count of what you have on hand. You can also barcode your shelves to keep track of where each bottle is located and make sure that nothing gets misplaced.

Enforce a Strict No Tolerance Policy for Employee Theft

Unfortunately, employee theft is one of the most common causes of inventory shrinkage. To help prevent this, it's important to have a strict no tolerance policy for any type of theft. Make sure your employees are aware of the consequences of stealing and be sure to follow through with them if anyone is caught stealing.

Improve Your Bar Layout

A good bar layout helps prevent accidental spills and other accidents when there are multiple bartenders working at a time. It also has plenty of spillover benefits– no pun intended– like faster service, happier employees, and more satisfied customers.

Avoid Over-Ordering

The first step to avoiding shrinkage is knowing exactly how much inventory you need to have. That's where counting inventory comes in. However, it's also important not to make the mistake of intentionally ordering more than you need as a safety precaution or because it seems easier. That's why accurate ordering processes are important.

Sitting Inventory that's just on the shelf is not only negatively impacting your profit, it presents more opportunities for employee theft, which is unfortunately the cause of a significant amount of shrinkage. You don't want to make your bar a hostile place for your employees, so rather than treating them like criminals, limit the amount of sitting inventory that's unused so it's immediately clear if anything is missing.

Split responsibilities

In a perfect world, you would be able to trust all of your employees equally. But the fact is, there will always be some people who are more trustworthy than others. One way to help prevent inventory shrinkage is to split responsibilities among your employees so that no one person has complete control over the restaurant or bar's inventory.

Implement a double check system

A double check system is where two people are needed to approve any changes to the inventory, or have someone responsible for ordering and someone else responsible for counting the inventory and managing product usage. This way, even if one person one person makes a mistake, there's always someone to catch it! Having clear ordering processes in place will assist you minimize the amount of mistakes your workers make.

Accounting and tax miscalculations

This is probably the most boring way inventory can disappear, but it's also the most common: An error in the accounting records It's easy to make a mistake when you're dealing with numbers all day, so it's important to have someone double check your invoices and records.

Accounting records are documents that shows the financial activities of a business. This document can include transactions such as sales, purchases, payments, and receipts. It's important to keep track of these transactions so that you can accurately report your business's financial status.

Your accountant can also catch tax miscalculations that also lead to inventory shrinkage. This is because the government taxes businesses based on their inventory levels. If you misreport your inventory, you could end up paying a significant amount more in taxes than you should and end up losing money at the end of the day.

Both of these mistakes can be prevented by hiring a professional accountant or bookkeeper to keep track of your finances and your accounting records.

Educate employees

Your employees are the ones who are on the front lines, so it's important to educate them on the importance of inventory management. Show them how inventory shrinkage can impact the business and stress the importance of being accurate when taking inventory.

Inventory management is an important part of restaurant & bar ownership, and shrinkage can have a big impact on your bottom line. By taking steps to prevent inventory shrinkage, you can save yourself time and money.

Avoid Purchasing Based on Quantity Discounts

It's tempting to take advantage of quantity discounts, but it's important to only purchase the amount of product you need. Buying in bulk may save you money upfront, but it will cost you in the long run if your inventory goes bad before you can use it all.

Track actual inventory shrinkage

In order to effectively prevent inventory shrinkage, you need to know how much inventory you're actually losing. The only way to do this is to track your inventory levels on a regular basis and compare them to your sales. This will help you identify any discrepancies so you can take steps to correct the problem.

Heightened security measures

This solution is a more extreme but in some cases, it may be necessary. If you've tried other solutions and you're still struggling with a shrinkage problem, it might be time to invest in security cameras or an alarm system. While no restaurant & bar owner wants to think that their employees are stealing from them, the sad truth is that it happens.

If you have a staff member who you suspect may be responsible for shrinkage, the best thing you can do is talk to them about it directly. If they're honest, they'll likely tell you what's going on and how to fix the problem.

If you don't feel comfortable confronting your employees about the issue, another option is to hire an outside company to conduct an audit of your bar.

This can be an expensive solution, but it may be worth it if you're struggling to get a handle on your inventory shrinkage. No matter what solution you choose, the important thing is to take action and do something about it. Ignoring the problem will only lead to more shrinkage and more lost profits.

Conclusion

Inventory shrinkage is a big problem for restaurant & bar owners, but it's one that can be effectively managed with the right solutions. By taking steps to prevent inventory shrinkage, you can save yourself time and money.

WISK restaurant management software is a great option that can help you save time and money by making your inventory as easy as scan, weigh, and done. You can also see inventory in real-time with our POS integrations. If you're struggling with inventory shrinkage, don't hesitate to reach out to us for help! We're always happy to chat about how WISK can help your business.

Share

Taking inventory should not take hours.