Inventory shrinkage is the stock your records say you have but your shelves do not. It is the value lost to theft, mistakes, damage and short deliveries between two counts. US retailers lost 1.6% of their sales to it in 2022, the last year the National Retail Federation published the figure.
Most articles stop at that average and one formula. They miss that two shrinkage rates exist and give different answers. They also miss that a loss costs far more in sales than its own value, and where shrinkage hides in a small shop.
What causes inventory shrinkage?
Theft causes most of it, and mistakes most of the rest. In the National Retail Federation's National Retail Security Survey 2023, 177 US retail brands split their 2022 losses as below.
| Source of loss | Share of shrinkage | In a small shop, for example |
|---|---|---|
| External theft | 36% | Goods pocketed, or handed over against a fake mobile money message |
| Employee theft | 29% | Goods given to friends, sales not rung up, refunds that never happened |
| Process failures and errors | 27% | A carton sold at the piece price, a delivery accepted without counting, a sale written in a book and never entered |
| Unknown | 6% | Losses nobody can explain |
| Other | 1% | Expired goods, supplier and third-party losses |
The same survey named the four commonest forms of employee theft: taking merchandise, refund fraud, taking cash, and passing goods to friends. Each one leaves a trace in the till's records if every person sells under their own sign-in.
These figures come from large US chains. For a small shop in Kampala or Lagos, the reliable figure is its own count, and the causes above are the list to check against.
How do you calculate inventory shrinkage?
Subtract the value of the stock you counted from the value your records show. The difference, at cost, is your shrinkage for the period between the two counts.
Shrinkage = recorded stock value − counted stock value
Turning it into a rate is where most guides go wrong, because two rates exist and they answer different questions.
| Rate | Formula | Use it to |
|---|---|---|
| Share of stock | Shrinkage at cost ÷ recorded stock at cost × 100 | Track your own trend, count after count |
| Share of sales | Shrinkage at selling price ÷ sales for the period × 100 | Compare with published figures |
The NRF's 1.6% is the second kind. Its survey measures shrinkage at selling price, as a percentage of sales, so a share-of-stock rate can't be compared with it.
A worked example in Ugandan shillings
For example, a shop in Uganda prices its goods at cost plus 25%. These are round, illustrative figures for the three months since its last count.
| Line | Figure |
|---|---|
| Recorded stock at cost | 18,000,000 |
| Counted stock at cost | 17,460,000 |
| Shrinkage at cost | 540,000 |
| Share of stock (540,000 ÷ 18,000,000) | 3.0% |
| Shrinkage at selling price (540,000 × 1.25) | 675,000 |
| Sales since the last count | 36,000,000 |
| Share of sales (675,000 ÷ 36,000,000) | 1.9% |
One loss, two rates. Track the 3.0% against your next count, and quote the 1.9% when you compare your shop with others.
What does shrinkage cost you in sales?
Divide the loss at cost by your gross margin: the answer is the extra sales needed just to earn the loss back. In the example, a 25% markup is a 20% gross margin, so UGX 540,000 ÷ 0.20 = UGX 2,700,000 of extra sales.
That is 7.5% of the period's sales, spent replacing goods that walked out. The often-repeated rule that "5% shrinkage means selling 5% more" is wrong, because the multiplier is the margin, not the rate. The thinner your margin, the more a small loss costs.
What is an acceptable shrinkage rate?
No rate is safe, but the NRF's last survey gives a yardstick: 1.6% of sales on average. Pharmacy, grocery, department stores and mass merchandise averaged over 2%, specialty clothing 1.9%, and jewellery, furniture and footwear below 1.5%.
Those 2022 figures are the latest, because the NRF stopped publishing its annual shrink report in 2024, Retail Dive reported. Treat them as a ceiling to stay under, not a target to reach.
A better target is your own: a lower rate than at your last count, and a smaller unknown share each time. The more of your loss carries a recorded reason, the better your controls are working.
Rule these out before you call it a loss
Many differences are records that haven't caught up with the shelf. Check these before you adjust anything:
- a sale held at the till and never finished;
- a delivery recorded as pending or ordered, but already on the shelf;
- stock sent to another branch and not yet received;
- goods sold under another product's code, so one line is short and another is over;
- a carton received as pieces, or pieces sold as a carton.
A count that finds more than the records show is shrinkage in reverse, and usually points to one of the same five gaps. The full counting routine is in stock taking vs stock checking, and a wider look at mismatches is in inventory discrepancy.
How to reduce inventory shrinkage
Match each control to a cause. A camera does little against a unit error, and a count sheet does little against a fake payment message.
| Cause | Control |
|---|---|
| Short or damaged deliveries | Count before you mark a purchase received; send short goods back with a purchase return |
| Damage and expiry | Record every damage with its reason; sell the earliest-expiring batch first |
| Cash or sales not rung up | Every cashier on their own sign-in and register; your phone alerted when a register closes short |
| Price and discount errors | Cashiers can't change prices in the cart; read the discount report weekly |
| Refund fraud | Returns only for roles that need them; watch the return ratio |
| Carton and piece errors | Set each pack-to-piece conversion once, in the product's units |
| Theft of small, valuable lines | Weekly spot checks; phones tracked by serial or IMEI number |
Staff who know the rules make fewer of the process errors, so build them into training on inventory handling. Software that records every stock movement as it happens leaves less to memory; see automated inventory management for the steps.
How to find and record shrinkage in ArmPOS
ArmPOS keeps each correction, each damage and each till's difference on record, so shrinkage can be traced to a shelf, a shift and a person. The same reports work for a shop in Kenya, Uganda or anywhere else.
- Count with a count sheet from Products › Count Stock, by warehouse and category. See Count and adjust stock.
- Correct the stock with an adjustment, entering the difference as a Subtraction or Addition, with a note.
- Record broken, spoiled or expired goods as damages, so they keep their reason. See Record damaged or spoiled stock.
- Read the Stock Adjustment Report: its quantity removed and each adjustment's cost give your shrinkage at cost. See Stock reports.
- Read the people side: the Cash Register Report shows each shift's cash difference, and the Users Report counts each person's returns and adjustments. See Open and close the register and Team reports.
- Lock the risky actions: leave "Change product details" and Delete off for cashiers. See Roles and permissions.
Shrinkage is an expense of the period it happens in: IAS 2 says all losses of inventories are recognised as an expense in that period. A damage in ArmPOS takes the stock out but books nothing in Accounting, so record the loss there too. For the routine around it, see inventory management for small businesses.
Frequently asked questions
Is shrinkage the same as damaged stock?
Damaged stock is one cause, with a known reason. Record it as a damage so it doesn't mix with the losses you can't explain.
What is the biggest cause of inventory shrinkage?
In the NRF's survey, external theft at 36% of losses, then employee theft at 29% and process errors at 27%.
How often should I measure shrinkage?
At every count. A busy shop that counts one category a month gets a shrinkage figure for each category, and spots a rising one within weeks.
Can shrinkage be negative?
Yes, when the count finds more than the records. It usually means a delivery wasn't recorded or a sale went under the wrong product.
Is inventory shrinkage an expense?
Yes. Under IAS 2, a loss of inventory is an expense of the period in which it happens.
Start measuring your own rate at your next count: create a free ArmPOS account, load your stock, and print the first count sheet.
