Retail Shrinkage – Definition & Formula

The term Shrinkage refers to loss or reduction in any process, product or business. The same refers to in the inventory management system also.

Shrinkage is a common term used in the inventory management system that decides the factors which are catering to the loss of the organization, which is termed as Retail Shrinkage or shrinkage loss.

Let us understand what is Retail Shrinkage in the further section of this article.

Retail Shrinkage

As we discussed in short, Shrinkage is basically the loss of inventories from the stock which occurs due to factors such as employee thefts, shoplifting, human errors, fraud, damage, etc.

Shrinkage can be simply defined as the difference between the recorded and actual inventory as per the company’s balance sheet. This is a common problem faced by retailers which incur losses in their business.

As we discussed in the above paragraph, shrinkage is the difference that occurred between the actual inventory count and the recorded inventory count from the inventory management system of a company. This occurs due to small mistakes while recording the stocks, some kind of illegal activities like theft, fraud in the inventory or damage that occurred due to a certain circumstance.

All these factors contribute to the loss that occurred and causes the so-called Shrinkage also termed Retail Shrinkage.

To overcome this, we can keep an eye on all the inwards and outwards from the inventory. For this, we can use various methods physical counting or automated one.

Impact of Shrinkage –

So, as we have learned about what does shrink mean in retail, let us now understand its impact on the overall business process and also on the inventory management system of the organization.

The largest impact of the retail shrinkage is the huge loss of profits, it is mostly in the retail business where businesses operate on low margins & high volumes. This means that the retailers have to sell more products in order to make a profit.

Another adverse effect of such shrinkage is that when a retailer loses his inventory, it is very difficult to recoup the cost of inventory as there is no inventory to sell or return.

Shrinkage is a part of every organization and some of them try to cover such profit downfall by increasing the price of products available to sell and cover-up for their incurred losses.

And these increased prices are later passed on to the customer who later bears the burden for the theft and inefficiencies which have been the cause for the loss of the company.

In such cases, this shrinkage can cause the company to lose a valuable customer base, who are not ready to spend more and are price sensitive.

Also, this shrinkage can increase the company’s costs in a few other areas where retailers invest in additional security which includes investment in security guards, technology, or other essential things in the organization that can help to prevent the shrinkage to some extent.

How to Calculate Retail Shrinkage

Retail Shrinkage is calculated with the following formula –

Shrinkage = (Value of Lost Stock / Total Sales for the said period) X 100

For example, if the value of loss is 15000 and the total sales for a period is 500000, then with the above formula we can calculate the Retail Shrinkage as –

 Shrinkage = (15000 / 500000) X 100 = 3%

This gets us the value of shrinkage loss as 3%.

This is how we calculate the shrinkage loss in percentage and we can come to a conclusion where we can try to prevent the losses by taking some preventive actions.

So, this is all about the Retail Shrinkage and its important details. To know more about such terms used in inventory management you can visit zapinventory.com and learn about them in more detail.