How Do You Reduce Inventory Shrinkage?

One of the most typical difficulties with inventory shrinkage is a fall in earnings in accounting records due to retailers. This issue will take longer to rectify because all of the records are listed in the account, which will take longer to update.

We will learn why inventory shrinkage occurs and what steps may be taken to prevent it in this blog. What procedures should be taken if this problem arises in order to correct accounting entries and increase profit margins while lowering inventory costs?


Inventory refers to the vast number of products and resources that a firm purchases in order to sell them on the market. The clients in the market will purchase these things. These products must be sold to generate a profit in the business. Inventory filled business is the term for this process.

Inventories shrinking causes a loss for businesses that rely on inventory. Let's look at some options for minimising this loss.

Inventory Shrinkage

Inventory shrinkage is defined as the difference between available items and purchased inventory. Because the available inventory is usually smaller than the inventory brought in, the corporation will lose money.

Inventory shrinkage is a common occurrence in the retail industry, and it has a significant impact on the company's profitability.

As a result of the shrinkage, the corporation raises the price of the goods it sells to customers. While shrinkage is unavoidable, there are measures that can be employed to minimise it.

Impact on Accounts 

The documenting of losses is essential to maintain track of inventory shrinkage, which lowers the company's profit.

The steps for tracking losses are as follows:

1. Recognize the losses that have occurred and document them.
2. The monetary losses must be accurately recognised.
3. The extent of the losses should be examined in the books.

If the loss is minimal, the COGS account will be charged; if the loss is large, a separate account will be created. Because the debit will be loss and mass losses can be controlled more efficiently from the company's earnings, a separate account should be formed to track the losses generated by shrinking.

The rise or decrease in gross margins due to shrinking can be accurately represented in the book as losses.

Inventory Shrinkage Rate

According to the business industry the average inventory shrinkage rate varies a lot. The optimum inventory shrinkage rate is approximately between 1% to 2%. The minimum the inventory rate the better is the profit. 

The key challenge for the inventory loss is to understand the cause of those losses which lead to the shrinkage. Therefore preventive actions should be taken to resolve the shrinkage. 

Causes of Inventory Shrinkage

Before moving forward to the methods to reduce the inventory shrinkage let us explore the reasons due to which this shrinkage occurs. Here is a list of few of them:

1.    Theft

Before we get into the strategies for reducing inventory shrinkage, let's take a look at why it happens in the first place. 

Here's a sample of some of them:

i.    Identity Theft

The identity theft is caused in small business where small packages are slipped inside the bags or beneath clothing’s. This stealing is known as shoplifting. In large business stealing can be difficult. Along with large products which can be saved from the theft.

ii.    Personnel Theft

This theft is caused by the staff members as they have easy access to the inventory making them in close contact with the warehouses to exploit the resources which have been saved. In today’s stats the personnel theft is caused around 42% in large business. As the resources are in large quantity stealing the commodities is easy. Although this is a theft which cannot be easily detected but it is not unachievable.

2.    Error in Administration

The wrong data entry, mistakes caused in cash accounting, or incorrect sales record etc. are the common errors which occur in the inventory shrinkage called as the administrative errors. The error indicating the losses in the account books is called error by administration.

3.    Damages

The damage is caused due to water leakage, breakage, cracking, and other reasons during the transit, storage from the retailers end. These damages makes it difficult for the commodities to be sold as the product gets damaged. All these losses have to be bared by the company causing losses and resulting in the inventory shrinkage.

4.    Perishable Inventory

There are many products which gets expired and due to this they need to be discarded. The products which come under this list are food, diary, medications, health care, and other variety of products. All these products are to be sold before their expiration date so that they can be used not causing any loss to the company. If the products are not sold the inventory wastage cost is factored into the shrinkage rate.

There are other factors which are also responsible for the inventory shrinkage as this is an unavoidable situation. But if proper measures and less carelessness is taken into consideration the inventory loss can be reduced and put them into practice.

Reduce Inventory Shrinkage

To overcome the above causes of inventory shrinkage some correct measures need to be taken in the company. As some business are unaware about the extra loss they are suffering because of not managing this loss. Therefore it is important to take some options into consideration for reducing the inventory shrinkage. 

Below are mentioned some of the effective strategies to change the procedures to ensure safety on the grounds of inventory management. 

1.    Responsible Staffing

The staff members hired are responsible for the inventory management. Therefore while hiring the employees should be evaluated on both technical and ethical grounds. According to stats 42% of the inventory shrinkage happens because of staff thefts. And this theft can be easily recorded. If the large companies hold one person responsible for the shrinkage and correct that action in the long run when the staff is extensively trained.

2.    Implementation of SKUs and Barcodes

To maintain the tracking of the items liquid transfer it becomes easy with SKUs and barcodes. As the SKUs and barcodes offer distinction for each product becomes helpful in identification. It also aids to determin which product is in higher demand than others and can be easily segregated .

3.    Check for Security

To track the products CCTV cameras should be installed in the warehouses for security checks. If the products are limited in quantity they can be tracked via tracking devices. When the security checks are made they should be non-negotiable as it is a theft. The cupboards and small packages should be locked. A manual screening process can also be done with anti-theft alarms to prevent the company from these thefts.

4.    Check your responsibilities

Another technique to ensure the inventory is safe can be done through cross-checking. Assigning two distinct staff to keep track of the inventory, compiling the reports, analysing them, and then comparing them on a regular basis is a tedious task but is worth to track the losses.

5.    Regular Inventory Audits

A supervisor should do regular basis checks of the inventory audits. This will make the employees and staff aware before anyone think of committing any fraud or mistake. As the employees have direct access to the inventory doing frauds becomes easy from there end. The regular checks will ensure tight security thorough inventory bookkeeping and minimization in the staff theft.

6.    Inventory Control Software

Instead of doing human labour a computerised inventory system helps in very less errors as the human error will be minimised. The calculation error like cash management and other visible holdings will increase in the inventory counts reducing the human error. All this will eventually lead to more transparent system.

7.    Inventory Checks on a Regular Basis

The inventory checks on regular basis help in estimating inventory-related losses and expenses.

The difference between the losses occurred over time in comparison to after the checks by keeping records in the long-run will aid in reduction of inventory shrinkage.


This issue should be the top priority of the company. The shrinkage can be accounted and prevented for good inventory control and management, despite how big or small is the business. 

A professional ecommerce company should be assisted for the business growth otherwise it becomes difficult to maintain the accountings. Assisting in managing the inventory turnover rate and lowering the inventory carrying expenses in order to save money for the company is important for the  growth.