Defining and Reducing Shrinkage
Published April 19th 2022
Food and beverage costs are one of the most variable, and one of the most manageable, costs in a restaurant. Shrinkage is a factor in the production and distribution of all goods that is practically impossible to fully eliminate, especially when dealing with perishable products. However, in a restaurant, techniques and practices can be put in place to greatly reduce shrinkage.
Properly calculating and managing shrinkage can increase a venue’s profitability by enhancing the accuracy of inventories, introducing accountability into a venue’s practices, and increasing the use of best practices.
It is first important to define shrinkage. The source of shrinkage in the restaurant then needs to be uncovered before techniques and practices can be implemented to reduce it.
Defining Shrinkage
Shrinkage, is the discrepancy between an actual inventory count and what your sales report for the period says you have sold. Shrinkage is calculated using inventories, invoices, and sales reports.
Shrinkage can be caused by a variety of factors, cannot be accounted for in menu prices, and will vary from period to period. The causes of shrinkage include: spoilage, spillage, over-serving, poor accounting, inaccurate inventory counting, not accounting for re-fires, and theft.
Shrinkage, is the discrepancy between an actual inventory count and what your sales report for the period says you have sold. Shrinkage is calculated using inventories, invoices, and sales reports.
Shrinkage can be caused by a variety of factors, cannot be accounted for in menu prices, and will vary from period to period. The causes of shrinkage include: spoilage, spillage, over-serving, poor accounting, inaccurate inventory counting, not accounting for re-fires, and theft.
Shrinkage, is the discrepancy between an actual inventory count and what your sales report for the period says you have sold. Shrinkage is calculated using inventories, invoices, and sales reports.
Shrinkage can be caused by a variety of factors, cannot be accounted for in menu prices, and will vary from period to period. The causes of shrinkage include: spoilage, spillage, over-serving, poor accounting, inaccurate inventory counting, not accounting for re-fires, and theft.
Shrinkage Formula
It is possible to calculate a venue’s shrinkage from readily available data. To properly calculate shrinkage you will need a starting and ending inventory, the sales data for the period between those inventories, and the invoices for the same period. The inventory shrinkage formula is as follows:
(Starting Inventory + Invoices) - Ending Inventory = Actual Product Used
POS Sales - Actual Product Used = Shrinkage
(Shrinkage ÷ POS Sales) x 100 = Shrinkage as a Percentage of Sales
All the amounts above can be in either currency or units. For an example a restaurant has the following figures:
- Starting Inventory = $20,000
- Invoices = $6000
- Ending Inventory $18,000
- POS Sales = $7200
Note that POS Sales should be the total amount sold for the period, including all discounts and comped items, along with any product recorded on the wastage record.
Entering these numbers into this formula we get:
($20,000 + $6000) - $18,000 = $8000
$7200 - $8000 = -$800
(-$800 ÷ $7200) x 100 = -11.1%
This means that there is $800 worth of product, or 11.1% of sales, unaccounted for on the POS system. This example covers a whole restaurant’s inventory, and the shrinkage could be occurring in one or many items that the restaurant orders and uses. To narrow down where the shrinkage is occurring it can be necessary to comb through the available data to work out which item is the culprit of the shrinkage.
It is possible to calculate a venue’s shrinkage from readily available data. To properly calculate shrinkage you will need a starting and ending inventory, the sales data for the period between those inventories, and the invoices for the same period. The inventory shrinkage formula is as follows:
(Starting Inventory + Invoices) - Ending Inventory = Actual Product Used
POS Sales - Actual Product Used = Shrinkage
(Shrinkage ÷ POS Sales) x 100 = Shrinkage as a Percentage of Sales
All the amounts above can be in either currency or units. For an example a restaurant has the following figures:
- Starting Inventory = $20,000
- Invoices = $6000
- Ending Inventory $18,000
- POS Sales = $7200
Note that POS Sales should be the total amount sold for the period, including all discounts and comped items, along with any product recorded on the wastage record.
Entering these numbers into this formula we get:
($20,000 + $6000) - $18,000 = $8000
$7200 - $8000 = -$800
(-$800 ÷ $7200) x 100 = -11.1%
This means that there is $800 worth of product, or 11.1% of sales, unaccounted for on the POS system. This example covers a whole restaurant’s inventory, and the shrinkage could be occurring in one or many items that the restaurant orders and uses. To narrow down where the shrinkage is occurring it can be necessary to comb through the available data to work out which item is the culprit of the shrinkage.
It is possible to calculate a venue’s shrinkage from readily available data. To properly calculate shrinkage you will need a starting and ending inventory, the sales data for the period between those inventories, and the invoices for the same period. The inventory shrinkage formula is as follows:
(Starting Inventory + Invoices) - Ending Inventory = Actual Product Used
POS Sales - Actual Product Used = Shrinkage
(Shrinkage ÷ POS Sales) x 100 = Shrinkage as a Percentage of Sales
All the amounts above can be in either currency or units. For an example a restaurant has the following figures:
- Starting Inventory = $20,000
- Invoices = $6000
- Ending Inventory $18,000
- POS Sales = $7200
Note that POS Sales should be the total amount sold for the period, including all discounts and comped items, along with any product recorded on the wastage record.
Entering these numbers into this formula we get:
($20,000 + $6000) - $18,000 = $8000
$7200 - $8000 = -$800
(-$800 ÷ $7200) x 100 = -11.1%
This means that there is $800 worth of product, or 11.1% of sales, unaccounted for on the POS system. This example covers a whole restaurant’s inventory, and the shrinkage could be occurring in one or many items that the restaurant orders and uses. To narrow down where the shrinkage is occurring it can be necessary to comb through the available data to work out which item is the culprit of the shrinkage.
The Causes of Shrinkage
Once the product (or products) that is the reason for the shrinkage has been found then a cause needs to be identified. There are many things that can be the cause of shrinkage and these can be split into four categories.
Poor Bookkeeping - When shrinkage amounts are as high as in the example above then there is often a bookkeeping error to blame. Review the data used to calculate shrinkage and identify any errors that may be causing it. The major errors to look out for are: miscounted inventory, incorrectly entered invoices, invoices in the wrong period, using the wrong period of sales data, discounted items or wastage logs not being included in the sales data.
Re-fires and replacement meals that are not accounted for in the POS system are also filed under poor bookkeeping, as such things should be recorded by floor managers.
Wastage - There are two major causes of wastage and these are spoilage and spillage. Spoilage includes both fresh and prepped products passing their use by date, along with the overcooking of foods so that they are not sellable. Spillage refers to any accidental product wastage, such as dropping it on the floor.
Over Serving - In terms of shrinkage, over serving is when a dish or beverage exceeds the recipe amount. This could be an extra strip of bacon on top of a bacon cheeseburger or an extra ¼oz of liquor in a drink. Over serving errors are often repetitive and can add up quickly.
Theft - It is said that 75% of restaurant shrinkage is due to theft. Theft includes the traditional style, taking product without permission, but it also includes the gifting of product to guests by employees without the consent of a manager.
Once the product (or products) that is the reason for the shrinkage has been found then a cause needs to be identified. There are many things that can be the cause of shrinkage and these can be split into four categories.
Poor Bookkeeping - When shrinkage amounts are as high as in the example above then there is often a bookkeeping error to blame. Review the data used to calculate shrinkage and identify any errors that may be causing it. The major errors to look out for are: miscounted inventory, incorrectly entered invoices, invoices in the wrong period, using the wrong period of sales data, discounted items or wastage logs not being included in the sales data.
Re-fires and replacement meals that are not accounted for in the POS system are also filed under poor bookkeeping, as such things should be recorded by floor managers.
Wastage - There are two major causes of wastage and these are spoilage and spillage. Spoilage includes both fresh and prepped products passing their use by date, along with the overcooking of foods so that they are not sellable. Spillage refers to any accidental product wastage, such as dropping it on the floor.
Over Serving - In terms of shrinkage, over serving is when a dish or beverage exceeds the recipe amount. This could be an extra strip of bacon on top of a bacon cheeseburger or an extra ¼oz of liquor in a drink. Over serving errors are often repetitive and can add up quickly.
Theft - It is said that 75% of restaurant shrinkage is due to theft. Theft includes the traditional style, taking product without permission, but it also includes the gifting of product to guests by employees without the consent of a manager.
Once the product (or products) that is the reason for the shrinkage has been found then a cause needs to be identified. There are many things that can be the cause of shrinkage and these can be split into four categories.
Poor Bookkeeping - When shrinkage amounts are as high as in the example above then there is often a bookkeeping error to blame. Review the data used to calculate shrinkage and identify any errors that may be causing it. The major errors to look out for are: miscounted inventory, incorrectly entered invoices, invoices in the wrong period, using the wrong period of sales data, discounted items or wastage logs not being included in the sales data.
Re-fires and replacement meals that are not accounted for in the POS system are also filed under poor bookkeeping, as such things should be recorded by floor managers.
Wastage - There are two major causes of wastage and these are spoilage and spillage. Spoilage includes both fresh and prepped products passing their use by date, along with the overcooking of foods so that they are not sellable. Spillage refers to any accidental product wastage, such as dropping it on the floor.
Over Serving - In terms of shrinkage, over serving is when a dish or beverage exceeds the recipe amount. This could be an extra strip of bacon on top of a bacon cheeseburger or an extra ¼oz of liquor in a drink. Over serving errors are often repetitive and can add up quickly.
Theft - It is said that 75% of restaurant shrinkage is due to theft. Theft includes the traditional style, taking product without permission, but it also includes the gifting of product to guests by employees without the consent of a manager.
How to Reduce Shrinkage
The above are the causes of shrinkage and you want to prevent them from occurring. To accomplish this shrinkage solutions are needed and these include: accurate record keeping and accounting are needed, alongside regular best practices training for employees.
Bookkeeping - Bookkeeping practices should be put in place to efficiently organize invoice and inventory data. It is also important that managers use best practices when recording re-fired or replacement meals to ensure that they are accounted for in the POS system.
Wastage - A wastage log should be implemented to account for all wastage and each occurrence should also have a reason attributed to it e.g. spoiled, overcooked, and dropped. Reviewing these logs will provide insights into the cause of the wastage and this informs how to reduce it. Techniques to reduce wastage include: employee trainings on best practices, such as FIFO, and reviewing par counts and prep quantities and reducing as necessary. Accidents are often unavoidable but should be monitored to look for frequent offenders and patterns that could indicate theft.
Over Serving - The production of menu items should be monitored to ensure that recipes are being followed and that the correct amount of product is being served. Bartenders should be pour tested and, for the kitchen, recipe cards should be created and chefs should be asked questions about the amount of product used when preparing menu items.
Theft - Extra security and close monitoring of valuable products may be required to ascertain who the culprit is. It is also worth reminding employees that giving away food and drink without a manager’s approval also counts as theft. Often, informing employees that product is being lost due to theft can stop it from happening, but that doesn’t help to catch the culprit.
The above are the causes of shrinkage and you want to prevent them from occurring. To accomplish this shrinkage solutions are needed and these include: accurate record keeping and accounting are needed, alongside regular best practices training for employees.
Bookkeeping - Bookkeeping practices should be put in place to efficiently organize invoice and inventory data. It is also important that managers use best practices when recording re-fired or replacement meals to ensure that they are accounted for in the POS system.
Wastage - A wastage log should be implemented to account for all wastage and each occurrence should also have a reason attributed to it e.g. spoiled, overcooked, and dropped. Reviewing these logs will provide insights into the cause of the wastage and this informs how to reduce it. Techniques to reduce wastage include: employee trainings on best practices, such as FIFO, and reviewing par counts and prep quantities and reducing as necessary. Accidents are often unavoidable but should be monitored to look for frequent offenders and patterns that could indicate theft.
Over Serving - The production of menu items should be monitored to ensure that recipes are being followed and that the correct amount of product is being served. Bartenders should be pour tested and, for the kitchen, recipe cards should be created and chefs should be asked questions about the amount of product used when preparing menu items.
Theft - Extra security and close monitoring of valuable products may be required to ascertain who the culprit is. It is also worth reminding employees that giving away food and drink without a manager’s approval also counts as theft. Often, informing employees that product is being lost due to theft can stop it from happening, but that doesn’t help to catch the culprit.
The above are the causes of shrinkage and you want to prevent them from occurring. To accomplish this shrinkage solutions are needed and these include: accurate record keeping and accounting are needed, alongside regular best practices training for employees.
Bookkeeping - Bookkeeping practices should be put in place to efficiently organize invoice and inventory data. It is also important that managers use best practices when recording re-fired or replacement meals to ensure that they are accounted for in the POS system.
Wastage - A wastage log should be implemented to account for all wastage and each occurrence should also have a reason attributed to it e.g. spoiled, overcooked, and dropped. Reviewing these logs will provide insights into the cause of the wastage and this informs how to reduce it. Techniques to reduce wastage include: employee trainings on best practices, such as FIFO, and reviewing par counts and prep quantities and reducing as necessary. Accidents are often unavoidable but should be monitored to look for frequent offenders and patterns that could indicate theft.
Over Serving - The production of menu items should be monitored to ensure that recipes are being followed and that the correct amount of product is being served. Bartenders should be pour tested and, for the kitchen, recipe cards should be created and chefs should be asked questions about the amount of product used when preparing menu items.
Theft - Extra security and close monitoring of valuable products may be required to ascertain who the culprit is. It is also worth reminding employees that giving away food and drink without a manager’s approval also counts as theft. Often, informing employees that product is being lost due to theft can stop it from happening, but that doesn’t help to catch the culprit.
Shrinkage Won’t Shrink to Zero
Sometimes, especially for venues seeing a high level of shrinkage, it is possible to see the effects of shrinkage reducing tactics almost immediately. On other occasions, pinpointing the source of shrinkage, and subsequently reducing it, can require putting improvements in place over a few inventory cycles.
It is worth noting that the techniques mentioned here can reduce shrinkage, but it is nearly impossible to reduce shrinkage to zero. Training and implementing best practices helps to get all employees onboard with reducing shrinkage, and these are a restaurant’s best tool against all forms shrinkage.
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