Inventory Shrinkage

By Annapoorna


Updated on: Apr 5th, 2022


3 min read

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Inventory shrinkage can drastically impact small businesses, impacting their profits. This is particularly problematic in a retail context, as firms run on low margins and huge volumes, requiring merchants to sell a large quantity of merchandise to break even. If a merchant loses inventory due to shrinkage, they will not repay the inventory cost since there will be no inventory to sell or return.

What is inventory shrinkage?

The term “inventory shrinkage” refers to the inventory loss due to unforeseen events. Shrinkage is the difference between the reported inventory and the actual inventory. Employee theft, shoplifting, administrative mistake, vendor fraud, damage, and cashier error are all examples of reasons for inventory shrinkage. Inventory shrinkage is a major issue for merchants since it leads to a loss of inventory, which equals a loss of earnings.

Causes of inventory shrinkage


Shoplifters can take advantage of your store’s vulnerable and undetected places. A few areas where they shoplift and go undetected include the gaps between aisles, racks, and dressing rooms.

Employee theft

Untrustworthy employees might steal things under your nose since they have access to more sections of the shop and are familiar with sales and inventory management systems. Internal theft takes several forms, including marking sellable products as broken, stock receipt miscounts, slipping things to pals during checkout, and applying excessive discounts.

Stock control and clerical errors

Other prominent causes of inventory shrinkage include stock control and clerical mistakes. Some errors are as basic as counting errors and do not indicate physical losses. Others can be expensive, such as marking all goods in a supplier shipment as “received in the whole” when certain things were missing.

Supplier fraud

In firms with complex supply networks, inventory may be controlled by third parties that are not linked with the company at some point in the supply chain. Theft can occur when the products are in transit from the supplier’s warehouse to the company location and during loading and unloading. Every time a delivery enters or leaves the business, it should be counted and documented.

How to calculate inventory shrinkage?

You must track your inventory levels to count your inventory and its shrinkage accurately. You can develop a system that works for you by using online tools for inventory management. You can also get your inventory management system automated. By comparing your reported inventory to your actual count, you can compute inventory decrease.

Inventory Shrinkage = Recorded Inventory – Actual Inventory

Your recorded inventory comes from either an integrated POS system that automatically tracks and reports on your inventory or a manual count that you conduct yourself. In this situation, the actual amount of inventory you lost, represented in units, will be your inventory shrinkage.

The inventory shrinkage rate can also be used to track inventory shrinkage. The percentage of products lost between what you recorded and what you sold is your inventory shrinkage rate.

Inventory Shrinkage Rate = (Recorded Inventory — Actual Inventory× 100)/ Recorded Inventory

Your inventory shrinkage rate is expressed as a percentage in this formula, unlike inventory shrinkage. There are several ways to prevent inventory shrinkage. Implementing a double-check procedure is the first step a business should take to reduce inventory shrinkage.

A business should assess potential workers and do a background check before hiring them to weed out individuals who have a history of stealing merchandise. Human errors and omissions can be avoided by automating the inventory management process. Finally, a specialised inventory management software package can also assist in reducing human stock handling and inventory loss.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more


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