What To Know About Inventory Shrinkage

person holding pencil on an accounting book to check inventory shrinkage

What is inventory shrinkage?

Inventory shrinkage is a common problem for retailers worldwide. It can result in a decrease in earnings and force you to change your accounting books, which would cost much more time and money.

To tackle severe inventory shrinkage, you must first understand what it is, why it occurs, and what you can do to avoid it. If this happens, you must know how to make correct entries in your books to ensure proper inventory accounting.

Causes of inventory shrinkage

Inventory shrinkage can be caused by various factors, which differ between brick-and-mortar and eCommerce businesses. According to SheerID, the possible reasons might be:

Theft from consumers

Often known as shoplifting, this refers to the situation when someone breaks into your physical store and steals a product. Theft can be easily avoided by implementing locked cases, ink tags, or involving manual, psychical monitoring for smaller, less valuable objects, depending on the type of goods you sell (food, produce, etc.)

Theft of employees

Employees who have full access to all of your goods can be able to steal from your stock. With employee theft accounting for 42% of inventory shrinkage, you’ll want to learn how to avoid it (e.g., proper warehouse management and security) and how to deal with it when it happens (which we’ll discuss in a later section).


Damage is described as something that renders inventory unsellable, especially during transportation. Broken packaging, holes, tears, water damage, product expiration, and other issues fall under this category.

Management errors

Inventory shrinkage might be the result of management mistakes such as miscounting, incorrect measurement units, or other forms of human error. This is also possible with automated inventory control.

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How to prevent inventory shrinkage?

The good news is there are various ways to avoid inventory shrinkage. Whether you are warehousing products or have your storefront, any combination of these methods can work.

Set up object monitoring

It’s not challenging to track goods, and it will help you determine if a piece of merchandise has vanished from the warehouse or the retail floor. Fashion stores, for example, have had great success with inkblot tag systems. Grocers can also lock their carts if they exit the parking lot’s immediate vicinity.

Monitor inventory regularly

You can do this in a cyclic pattern to cut down on time, but inventory tracking and management are critical. It’s better to using technology that can keep inventory counts updated in real-time rather than Excel, which is static and can not be synced to anything.

Audits that catch you from balance

If your workers, who are cheating on you, are aware that audits are on the way, they will have time to plan. In this case, it’s better to identify inconsistencies in the inventory counts more with a surprise inventory audit.

Increased security precautions

Installing cameras and surveillance systems in your shop is beneficial for brick-and-mortar stores. Clear garbage bags after every shift. This helps ensure no one places inventory in a bag that they carry home while claiming it’s trash.


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