Where Did the Money Go? Disappearing Inventory and Ghost Expenses

by QuickBooks

4 min read

It can be alarming to find yourself looking at a year-end inventory report in January that does not remotely resemble what it should be. Where are all those parts and pieces? What happened to supplies and inventory? Cases of wine or expensive food items that are just … gone?

Amid the excitement of starting a new retail business, many first-time owners are consumed with excitement of finding new customers or filling orders. But poor attention to detail and sloppy accounting may result in disappointment—or even disaster.

Ghost expenses are those unrecorded things that eat away at your hard goods, cash and time—eroding your profits. Inventory is the most common (and expensive) profit erosion for retailers. Other types of ghost expenses business owners need to track include donations, theft, petty cash and unrecorded incidentals, food spoilage and waste, complimentary giveaways, unrecorded samples and wasted employee time.

It’s absolutely critical to get on top of these issues, according to Sheldon Haynie, owner of Lightheart Cellars in San Martin, Calif. “You’d be be amazed at how many bottles of wine get used for tasting, events and gifts,” he says. Cate Cooper, a winery event coordinator and owner of Wine Chic Events in Port Orchard, Wash., agrees. “You really need to do weekly inventory, hire people you can trust and keep good records,” she says.

Haynie and Cooper agree that taking weekly inventory is important. “In a small gift shop, it’s not a big chore—maybe 20 minutes,” says Cooper. “And it’s so much easier to remember, ‘Oh yeah, we comped a case of wine to the winemaker’s uncle and forgot to write it down.’ But at the end of the month? Memory fails, your inventory is a mess, and someone’s in trouble. Bad news all around.”

Kimberly Tippit, who previously owned a beer- and winemaking supply store in Bellevue, Wash., stresses that every little thing needs to be written down and accounted for. “We bought ingredients in bulk, portioned them and packaged for retail. Whenever we did a brewing class, all ingredients were accounted for. Any sample products given or bad yeast cultures were all accounted for. Shrink (theft) cannot be itemized all the time, but it can be accurately estimated if you are documenting everything else.”

Tippit adds, “We stepped up the register, added SKUs and hired an experienced accountant to help with the books. Once we had all measures in place, monthly inventories and reconciliations revealed the missing money. I do not think there is a 100% foolproof measure to identify every penny, yet every penny needs to be categorized. As a business owner, I believe you need to watch your money and know where it goes.”

Small, unrecorded expenditures add up, too, Haynie adds. “Out-of-pocket purchases, like stopping at the hardware store for irrigation fittings, are not material, but it’s the sort of expense that can be cumulative. I will run to the hardware store and buy what I need to fix a piece of equipment, or repair a trellis and not take the time to record the expenses. Those $20 purchases add up.”

Letting employees sit idle when sales are slow means you are paying people to do nothing. When sales are slow, put your staff to work mailing or handing out flyers, making calls to upsell clients or inputting email addresses. It may help to have a notebook or list near the cash register of things to do when it’s slow.

Retail businesses are often asked for donation requests, especially as the holidays near. A good approach is to let your staff know that you require every solicitation to be made in writing, on the organization’s letterhead, with a full description of the fundraising event. Verify the information, only donate what fits your budget, and have your staff prepare the donation during downtime. And don’t forget to record all expenses, including the items donated and the gift packaging.

“The consequences of not properly identifying expenses and losses as they occur results in inexplicably shrunk profits,” Tippet says. “If you went into business, that should be enough motivation to do it right!”

For more tips on controlling your costs, check out our article on 10 ways to reduce your expenses.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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