What is inventory shrinkage?
Inventory shrinkage matters because every unit that goes missing was already paid for, so the loss comes straight out of profit and inflates cost of goods sold (COGS). The gap opens up for reasons other than a sale, such as theft, damage, spoilage, clerical mistakes, or fraud. Watching it closely is central to strong inventory accuracy, because shrinkage is the space between what your records claim and what you can actually count.
Key characteristics
- Non-sales loss: the discrepancy never comes from a sale; it comes from theft, damage, spoilage, admin error, or fraud.
- Measured against book records: it is the difference between your recorded (book) inventory and a physical count, often shown as a shrinkage rate. The simple formula is: Shrinkage = value of recorded inventory − value of on-hand inventory.
- Theft is the biggest driver: according to the National Retail Federation (FY 2022 data), internal and external theft drives most shrink and accounted for nearly two-thirds (65%) of retailers’ shrink.
- A moving target you monitor, not eliminate: businesses track it over time with methods like cycle counting rather than expecting it to hit zero.
- Hits profit and can cause stockouts: it raises COGS, distorts your stock data, and can leave you short of items you thought you had.
Example
Say a warehouse’s records show $50,000 of stock. A physical count finds only $47,500 on the shelves. The shrinkage is $2,500 ($50,000 minus $47,500), which works out to a 5% shrinkage rate. For context, the NRF National Retail Security Survey reported that the average shrink rate in FY 2022 was 1.6% of retail sales, representing $112.1 billion in losses.
Related terms
- Physical inventory count: the full stock count that surfaces shrinkage against book records.
- Inventory control: the broader discipline that keeps shrinkage in check.
- Ways to prevent shrinkage: practical tactics for reducing stock loss.
FAQ
How do you calculate the inventory shrinkage rate? Subtract the value of your physical count from your recorded (book) value, divide the result by the book value, and multiply by 100.
What is an acceptable inventory shrinkage rate? Most businesses aim to keep shrinkage below about 1.5% of sales, and many retailers target 1% or less; higher rates usually point to theft, spoilage, or record-keeping problems.
What causes inventory shrinkage? The main causes are theft (external or internal), damaged or lost goods, employee and admin errors, spoilage, and fraud.