Inventory shrinkage is the gap between what your records say you have and what a physical count actually finds — the result of theft, damage, administrative error, or supplier discrepancies. Measuring it regularly is the first step to figuring out which of those causes is actually responsible.

The shrinkage formula

Shrinkage % = (Recorded Value − Counted Value) ÷ Recorded Value × 100. Compare your system's recorded quantity or value to a physical count for the same period; the difference, valued in dollars, is your shrinkage.

Example: your system says you should have $50,000 in stock, but a physical count finds $48,500. Shrinkage = ($50,000 − $48,500) ÷ $50,000 × 100 = 3%.

Shrinkage is also commonly expressed as a percentage of sales rather than inventory value use whichever benchmark your industry typically reports so you can compare against a meaningful reference point.

See also: the inventory shrinkage glossary entry, how to prevent inventory shrinkage, how to set up cycle counts.