Inventory shrinkage

Inventory shrinkage definition

Occurs when physical inventory count is lower than the amount recorded on the company balance sheet. The discrepancy may be attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error.

One of the biggest drains on a retail business is inventory shrinkage both in-store and in-warehouse. According to the Retail Security Survey published by the National Retail Foundation, inventory shrinkage cost the retail industry a total of \$61.7 billion in 2020.

Here’s how to calculate inventory shrinkage:

Inventory shrinkage and rate are determined for a specified period, such as the fiscal quarter or year. Inventory shrinkage is calculated by subtracting actual inventory value by recorded inventory value. The shrinkage rate is calculated by dividing inventory losses by the amount of inventory you should have, and multiplying that number by 100 to determine the rate.

To calculate the rate, you’ll need to determine the following:

• A physical count of actual inventory and its value.
• The recorded inventory, or inventory you should have, and its value.
• Deduct the value of actual inventory from the recorded value to determine inventory loss (inventory shrinkage).
• To calculate the rate, divide inventory loss (inventory shrinkage) by the recorded inventory and multiply by 100.

Inventory shrinkage = recorded inventory value – actual inventory value

Inventory shrinkage rate = inventory shrinkage / recorded inventory value * 100

For example: Joe’s Accessories has \$5200 mobile accessories. After conducting an actual inventory count, they determine the value on hand is only \$4900. Joe’s Accessories realized inventory shrinkage of \$300 with a rate of 5.7% over a specified period (fiscal quarter or year).

Inventory Shrinkage = \$300 (\$5200 [recorded inventory] – \$4900 [physical inventory])

Rate = 5.7% (\$300 [inventory shrinkage] / \$300 [recorded inventory] * 100)

Read the full blog on the topic of inventory shrinkage and find out what you can do to prevent losses to your business.

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