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How to Create a Loss Prevention Strategy for Your Business
April 20, 2022
The Importance of Loss Prevention in Retail Businesses

How to Create a Loss Prevention Strategy for Your Business

Loss prevention refers to the steps businesses take to reduce profit loss. The causes of profit loss, addressed by loss prevention, include theft, fraud, and human errors.

To combat loss, you must understand the most common causes. They include external and internal theft, supplier fraud, inventory shrinkage, and administrative errors. This post will explain loss prevention best practices, such as retail security, proper cash handling, and staff buy-in.

Why Is Retail Loss Prevention Crucial?

Loss, also called shrinkage, takes away from your hard-earned profits. More seriously, it can lead to problems that make it difficult to stay in business. While a loss may occur in any industry, prevention is critical for retail stores.

If shrinkage is too high, you may have to raise your prices, damaging your relationship with customers. You may find yourself unable to pay employees, purchase inventory, and cover your building lease. The risk is incredibly high for businesses with low-profit margins, like grocery and liquor stores.

Investing some money and effort into loss prevention may lead to higher profits and more business growth.

Addressing loss can have unexpected benefits for your business beyond saving money. For example, if you find that internal theft is frequent, you may need to revamp training or install surveillance cameras. If administrative errors are causing shrinkage, you can address factors like outdated software.

How to Identify Retail Loss Culprits

It’s essential to understand the different types of loss to begin preventing them. Understanding how loss occurs will help you develop a strategy to avoid it.

Loss can occur inadvertently or through deliberate action. Theft and fraud are examples of losses that occur because of an employee or other person’s purposeful actions. Errors, while unintentional, also lead to loss.

Internal Theft

Internal theft, or employee theft, is when an employee steals money or property from their employer. This type of loss is surprisingly common. Compared to non-employees, employees are 15 times more likely to steal from their place of business.

External Theft

External theft leads to 36.5 percent of shrinkage, according to a National Retail Federation study.

The two main types of external theft are shoplifting and organized retail crime (ORC). Shoplifting is when a person steals while acting as a customer and can be planned or spontaneous. On the other hand, ORC is an intentional form of theft involving two or more participants.

Your employees should also be aware of return fraud, which occurs when a shoplifter steals an item, then returns it to the store for cash.

External Theft

Suppliers Fraud

There are different types of supplier fraud, also called vendor or procurement fraud.

Someone can pose as a legitimate vendor that doesn’t exist, obtain payment, and then disappear. An employee of an authorized vendor can inflate the cost of goods or services and pocket the difference. In addition, vendors sometimes use bribes or extortion to gain an unfair advantage over clients.

Admin Errors

Understandably, your employees are human, and humans make mistakes. In addition, outdated POS systems and software can also cause errors. These types of administrative errors contribute to 19 percent of retail shrinkage.

Admin errors may result from improper training, overwork, or carelessness. Examples include mispricing merchandise and overpaying vendors.

4 Loss Prevention Best Practices

It’s impossible to avoid loss entirely. However, following strategies to reduce loss can make a big difference in how it affects your bottom line.

1. Handling Of Cash

Even as credit cards and payment apps grow in popularity, many customers prefer cash. Unfortunately for the retail industry, handling money leads to opportunities for mismanagement.

Automating cash handling processes reduce the likelihood of errors. For example, a currency counting machine counts cash for you and is faster and more accurate than a person.

A cash recycler is another option that stores cash securely after counting it and ensuring its validity. It then dispenses money, tracks the amount dispensed, and calculates the remaining funds.

If you decide to invest in cash handling equipment, ensure that your employees know how to use it. To avoid theft, you must keep cash physically secure at all times.

2. Physical Location Security

Properly securing your physical location reduces internal and external theft. Depending on your store’s size, you may decide to appoint staff to prevent shrinkage or hire a loss prevention contractor.

Below, you’ll find a few ways to ensure physical location security:

  • Ensure your store is well-lit because shoplifters rely on shadowy areas to steal items.
  • Limit exit points as much as possible. A single exit is easier for cashiers and other employees to monitor.
  • Arrange shelving to allow employees to have a line of sight to the entrance.
  • Install surveillance systems, which deter thieves and can help you pinpoint where loss is occurring.

2. Product Security

Keeping your products secure without discouraging sales can be tricky. However, security solutions can help combat this common problem.

Electronic article surveillance (EAS) is a popular method in which you can attach security tags to items. A cashier must deactivate the tag at the point of sale. If the tag isn’t deactivated, it sets off an alarm when someone removes the item from the store.

EAS systems may use electromagnetic, acousto-magnetic, or RFID scanners to detect the tag at the door. RFID is gaining popularity, partly because RFID tags contain a unique identifying number. If a theft occurs, you can identify what item was stolen.

A locked display case is a useful option for high-ticket items like electronics and jewelry. However, you should ensure that customers can still look at the products in the case.

3. Staff Member Buy-In

Even the best loss prevention strategy will fail if employees aren’t committed to implementing it. Staff buy-in and attentive customer service are crucial for reducing internal theft.

Be transparent with your team about the effects of loss on your business. Understanding that their paycheck or job could be at stake will inspire employees to get involved.

Create a system of clear goals and rewards to motivate your employees. Depending on your business’s finances, you may be able to offer employees a monetary bonus for meeting loss prevention goals.

If a bonus isn’t possible, consider recruiting employees for a loss prevention team. These employees should be detail-oriented and understand how to identify suspicious behavior.

Even if employees aren’t on your loss prevention team, you should train them on loss prevention measures. Proper training takes time but will pay off down the road. Ensure that employees know what to do if they witness internal or external theft or notice an admin error.

Conclusion: Make Loss Prevention a Priority

Retail business owners invest countless hours and dollars into their store’s success. Taking steps to prevent loss is a meaningful way to protect your business assets. By understanding different shrinkage causes and how to address them, you can keep your business safe.

Do you need extra funding to implement a loss prevention strategy or recover from a loss? Receive a free quote from Fora Financial today.



Frequently Asked Questions

What is loss prevention?

Loss prevention is how businesses avoid losses of money and property.

What are the most common causes of loss or shrinkage?

Theft is a common cause of loss. Internal theft occurs when employees steal from their workplace environment, while external theft includes shoplifting and organized retail crime. Suppliers can commit fraud, as can a fraudster posing as a supplier. Administrative errors are a frequent unintentional cause of loss.

What are some best practices for preventing shoplifting?

Handle cash carefully and automate processes when you can. Keep your building and products secure. Obtain staff buy-in through proper training and motivational tactics.

Editor’s Note: This post was updated for accuracy and comprehensiveness in April 2022.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].