Shrinkage is the loss of assets in a foodservice operation, usually food or liquor. As Geller (1992) underscores, this loss is usually the result of inadequate internal controls.
Restaurants suffer greater losses associated with shrinkage than other businesses because the majority of assets are consumable and easily usable. For example, food and liquor have demonstrated value to employees. Furthermore, employees can use inedible assets such as plates, silverware, glassware, cleaning supplies, table cloths, napkins, and candles at home. It is for this reason that shrinkage is the leading cause of business failure for restaurateurs.
Shrinkage also results in increased costs for the respective categories on a firm’s income statement. Take, for example, the effect of stolen steaks. Since the food cost for a given period (see cost of goods) is calculated by assessing what was taken from inventory during the period, it is difficult to distinguish what was sold to guests and what was stolen; both phenomena result in reduction of inventory and an increase in the cost of goods.
Operators’ best defense against shrinkage involves eliminating the opportunity for employees to steal. This extends to proper purchasing, receiving, and inventory management practices. With such practices in place, along with effective internal controls and monitors, shrinkage can be all but eliminated.
Geller, A. N. (1992). Internal Control: A Fraud Prevention Handbook. Ithaca, (NY): Cornell Campus Store.