A Beginner’s Guide to Inventory Shrinkage

You might involve another employee so you can compare your numbers. First, calculate your cost of goods sold and subtract the amount from your inventory. Subtracting your cost of goods sold from your inventory shows your inventory’s book value, or the recorded amount. First, you need to figure out how much inventory your books say you have.

When running a business, you likely face setbacks due to unforeseen costs. Unplanned expenses, like inventory shrinkage, can lead to a drop in profits and require you to alter your accounting books. You’d like to know how much of your inventory is a loss, so you decide to determine your inventory shrinkage rate.

In accounting, you’ll want to record retail shrink in your inventory to reflect the fact that there was a loss in value. Conversely, debit your shrinkage expenses account to indicate the increase in expenditures for your business. The goal is to always be on top of your inventory reconciliation to catch shrinkage as it happens. If you have inventory that’s at particular risk for theft, such as batteries or low-cost accessories, consider focusing multiple cycle counts in a row on those SKUs. Good stock management practices will help you keep on top of inventory shrinkage, though, so implement frequent cycle counting practices instead.

Products can get damaged in shipping, on the loading dock, or during the picking and packing process. Because eCommerce goods pass through many hands on the way to the end customer, damage is likely to be part of your shrinkage factor. Change happens, and when it does, merchants shouldn’t have to worry about their inventory or workflow being in jeopardy. Learn how the right technology and the right partnerships can safeguard your business against inventory shrinkage with these 6 tips. Inventory Shrinkage – It is the difference between the cost price of inventory available and of inventory bought. When dealing with vendors, it’s important to verify orders with vendors and double–check on purchase orders.

Inventory is most merchants’ greatest investment, and protecting that investment should be top priority to maintain margins and bottom line revenue growth. Ideal Inventory Shrinkage Rate – The ideal inventory shrinkage rate is between 1% and 2%. An automated inventory system helps the company to escape from depending on manual labor. It will also speed up the process of inventory count, cash management, better insight holdings, and more. This will ultimately result in a reduction of errors and losses in the process. How you choose to deal with inventory shrinkage will depend on your industry, budget, and the type of shrinkage affecting your business the most.


If follow-ups are needed with vendors, implement that as well. This is by the norm, one of the most effective ways to bring down shrinkage. Understand that shrinkage is expressed in financial value.

The employee should be assessed on moral grounds as well as on expertise. This way, the company can hold one person accountable for inventory shrinkage and rectify the situation in the long run. To find the inventory shrinkage rate, divide your inventory losses by the amount of inventory you should have. In some cases, you might have inventory shrinkage because of malicious actions, such as theft, shoplifting, or fraud. Vendors may commit fraud and give you less inventory than what you purchased. Shrinkage is also common when customers shoplift from your business.

What is the inventory value in QBO and what is your actual inventory? Is your inventory in QB $1.3M higher than your actual inventory? Have you been adding to inventory and not reducing it when sold somehow? Did you file taxes and report your inventory and cost of goods sold correctly on your tax returns?

  • Since many products don’t have GPS trackers on them, you won’t know where they end up.
  • This will ultimately result in a reduction of errors and losses in the process.
  • Inventory shrinkage occurs when the number of products in stock are fewer than those recorded on the inventory list.
  • Record inventory losses by increasing your Shrinkage Expense account and decreasing your Inventory account.

With proper inventory control and management, you can account for and prevent shrinkage, no matter the size of your business. Most 3PLs provide transparent reporting and technology to help you control stock levels to prevent inventory shrinkage. This “surprise” inventory audit should occur completely at random, preventing any advanced planning or number manipulation ahead of the count. You’ll get a clear look at what’s really going on in your stockrooms without having to count every single thing on hand. Once you’ve adopted an effective inventory management system, these six tips and tricks can help lower your company’s risk of inventory shrinkage. The best fulfillment services companies will have low or no shrinkage allowances.


Administration errors mean the reason for the appearance of inventory shrinkage in the books is because of administrative fault. This can be because of wrong data entry, errors in cash counting, not recording the sales right. Recording losses that occurred by inventory shrinkage is mandatory. To record the losses you will have to understand the losses.

How do you control shrinkage?

This way, he can track the movement of every product, even without his physical presence. If one employee has access to recording and processing receipts, they could be tempted to falsify the reports. You can counteract this by letting different employees handle recording and processing receipts, or at least for quality assurance. Damage refers to anything that causes the inventory to become unsellable. This includes broken packaging, cracks, tears, water damage, product expiration, and more.

Inventory Shrinkage: Definition & How to Prevent It

Not only does this reduce inventory shrinkage, it also creates accountability and a true partnership between merchants and 3PLs and 4PLs. These damages could be during transportation, while in the storage unit, or at the 5 work from home tips this entrepreneur used to create a successful business store. Water damage, breakage, cracking, etc. all factors fall under the category of damage. This forces the business to incur the loss caused from the company’s inventory accounts resulting in inventory shrinkage.

The likelihood and severity of each of these will depend on your industry. Some shrinkage is expected for any retail store, but you want to keep an eye on just how high your shrink is, as it can reduce your profits. But it’s harder for the wholesaler to count the 598 cases of wine they got from the vineyard. And more so for businesses that receive thousands of items. If it’s unrealistic to count, it’s unrealistic to verify that you got the right amount.

What Is Shrinkage: How to Calculate Inventory Shrinkage

The OmniFlow suite of tools provides visibility from fulfillment through delivery with platform-level transparency so brands can stay ahead of low inventory. The platform’s real-time insights and predictive analytics allow brands to forecast inventory needs and never be caught with out-of-stock products. Ensuring optimal inventory levels can improve customer satisfaction and build customer retention. Miscounting, poor record keeping, and damage can also add to your shrink rate.

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