The Importance of Loss Prevention in Retail Businesses - Fora Financial
The Importance of Loss Prevention in Retail Businesses
January 23, 2020
The Importance of Loss Prevention in Retail Businesses

The Importance of Loss Prevention in Retail Businesses

What is loss prevention? This term refers to the steps businesses take to reduce profit loss. The causes of profit loss, which are addressed by loss prevention, include theft, fraud, and errors.

To combat loss, begin by understanding the most common causes. They include external and internal theft, supplier fraud, inventory shrinkage, and administrative errors. Next, learn established best practices, such as retail security, proper cash handling, and staff buy-in. 

Retail Loss Prevention Is Crucial

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

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

Investing some money and effort into loss prevention is likely to 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 If administrative errors are causing shrinkage, you can address factors like outdated software

High, ongoing shrinkage can be a sign that your business model isn’t working. Perhaps you’ve implemented loss prevention strategies, but your loss percentage is still high. If this is the case, you might need to employ new sales or marketing tactics to generate more profit overall. 

Where To Start When Planning?

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 loss that happen because of an employee or other person’s purposeful actions. Errors and mistakes, while unintentional, also lead to loss. 

Internal Theft

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

Time theft, where employees conduct personal business on the clock, is another form of loss.

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. ORC, on the other hand, is a planned form of theft involving two or more participants. 

External Theft

Suppliers Fraud

There are different varieties of supplier fraud, also called vendor or procurement fraud. Someone can pose as a legitimate vendor that doesn’t actually exist, obtain payment, and then disappear. An employee of an authorized vendor can inflate the cost of goods or services and pocket the difference. Vendors sometimes use bribes or extortion to gain an unfair advantage from a client.

Admin Errors

You and your employees are human, and humans make mistakes. Outdated software can also cause errors. These types of administrative errors contribute to 19 percent of retail shrinkage

Admin errors may be the result of improper training, overwork, or simple carelessness. Examples include mislabeling or mispricing merchandise and overpaying vendors.

Loss Prevention Best Practices

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

If you need help, a loss prevention specialist can work with you to ensure you’re following the right steps. 

Handling Of Cash

Even as credit cards and payment apps continue to grow in popularity, many customers prefer cash. Unfortunately for retailers, handling cash leads to opportunities for theft and mistakes. 

Automating cash handling processes reduce the likelihood of errors. There are equipment options that can help. 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. It stores cash securely after counting it and ensuring its validity. It then dispenses money when you need it and tracks the amount that was dispensed and the amount remaining. 

If you decide to invest in equipment for cash handling, make sure your employees know how to use it. As far as avoiding theft, keeping cash physically secure is vital. 

Physical Location Security

Properly securing your physical location reduces internal and external theft. Depending on factors such as your store’s size, you may decide to appoint staff to prevent shrinkage. You can also work with a loss prevention contractor. If you choose to manage physical security yourself, there are a number of steps to follow. 

Ensure your store is properly lit. Shoplifters and people engaging in organized retail crime rely on shadowy areas to avoid notice.

If possible based on your store layout, limit exit points. A single exit is easier for cashiers and other employees to keep an eye on. Also, arrange shelving to allow employees to have a line of sight to the exit. 

Surveillance systems deter thieves and can help you pinpoint where loss is occurring. Do some research or speak with a loss prevention professional to determine the best placement for cameras. 

Security of Products

Keeping your products secure without discouraging sales can be tricky. Luckily, new security solutions are developed all the time. 

Electronic article surveillance (EAS) refers to the popular method of attaching security tags to items. A cashier must deactivate the tag at the point of sale. If it isn’t deactivated, it sets off an alarm when someone removes it from the store. 

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

For high-ticket items like electronics and jewelry, a locked display case is a useful option. Make sure that customers can still get a good look at the products in the case.

Buy-In Of Staff Members

Even the best loss prevention strategy will fail if employees aren’t committed to implementing it. Staff buy-in is particularly important 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 drive workers to get involved. 

Create a system of clear goals and rewards to inspire your employees. Keep in mind that different people are motivated by different things. For some, a modest monetary bonus for meeting loss prevention goals is an ideal reward.

Others appreciate recognition among their peers. For these employees, consider recruiting them for a loss prevention team. These employees should have attention to detail and be trained to identify suspicious behavior and then act accordingly per company guidelines.

Even if employees aren’t on your loss prevention team, they should be trained 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 come across an admin error. When dealing with vendors, employees should know what to expect and the signs that something isn’t right. 

Last Thoughts On Loss Prevention in Retail

Small retail business owners invest countless hours and dollars into their store’s success. Taking steps to prevent loss is an essential way to protect your investments. Begin by understanding different causes of shrinkage and the best practices for addressing them. 

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

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 is when employees steal from their workplace, 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 avoiding loss?

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. 

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].