Inventory Shrinkage

Inventory shrinkage is the excess of inventory that is recorded in accounting records but does not actually exist in the inventory. High shrinkage levels may point to theft, damage, miscounting, wrong measurement units, evaporation, or other problems. Supplier fraud, where a supplier pays a business for a specific amount of items supplied but does not actually dispatch all of the goods, is another scenario that could result in shrinkage. As a result, the recipient records the invoice for the full amount of the products while recording fewer inventory units; the difference is shrinkage.

Do a physical inventory count, determine the cost of the inventory, deduct this cost from the cost indicated in the accounting records, and this will give you the amount of inventory shrinkage. The percentage of inventory shrinkage is calculated by dividing the difference by the quantity recorded in the accounting records.

Example of Inventory Shrinkage

Inventory for ABC International is valued at $1,000,000 according to accounting data. The actual quantity on hand is determined to be $950,000 when a physical inventory count is completed. Hence, $50,000 ($1,000,000 book cost - $950,000 actual cost) is the inventory shrinkage amount. The shrinkage rate for inventory is 5% ($50,000 in shrinkage / $1,000,000 in book cost).

Factors Influencing Inventory Shrinkage

Inventory shrinkage is caused by a variety of factors. Nonetheless, the following are the primary causes:

  • Shoplifting
  • Administrative mistakes and paperwork errors
  • Vendor fraud or mistake
  • Product Damage or Expired Product

How to Prevent Inventory Shrinkage?

1. Implement a double-check system

Implementing a double-check system is the first step a corporation should take to stop inventory shrinkage. It should designate more than one person to key inventory management tasks like accepting merchandise, registering stock, and signing bills.

Having a second individual check the records helps avoid inaccuracies and leaving out important information. A double-check technique also aids in spotting gaps that can cause stock shrinkage and in putting fraud prevention measures in place.

2. Vet potential employees thoroughly

In order to pick out candidates with a history of stealing merchandise, a business should thoroughly interview candidates and run background checks on them before hiring. To learn about a potential employee's behavior and general conduct, the business should get in touch with past employers.

A potential employee should generally not be hired if they have a long history of acting improperly. The hiring process should include extensive training on proper inventory handling and stock management.

3. Automate inventory management

Human-caused errors and omissions can be avoided by automating the inventory management process. Reduce manual stock handling and inventory shrinkage with the use of specialized inventory management software.

All people participating in the inventory management process will be held accountable by the software. The system will keep track of the movement of the merchandise from the point of origin to the point of sale, tally the amount of keystrokes, and generate records for each user who signed in.

4. Track inventory shrinkage

To determine if inventory shrinkage is rising or falling over time, a company should monitor the proportion of inventory shrinkage. It is important to contrast the current inventory count with past inventory counts.

The company's inventory management strategies have reduced stock shrinkage if the shrinkage percentage has dropped over time.


Inventory shrinkage can have a wide-ranging impact on your organization. It might also have an impact on your team or employee relationships. You must reduce inventory shrinkage while increasing earnings. Choose the most recent and effective Inventory Management strategy to do this. With the right software, you can undoubtedly see the depths of the problem and resolve it quickly.

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