Cash & working capital
Inventory Shrinkage
Formula reviewed by Tahir Asif, CMA
The loss of inventory between what the books say you bought and what you can sell, from theft, damage, error or spoilage.
Shrinkage is the difference between recorded inventory and the physical stock, found at a count. It includes theft by customers or staff, damage, spoilage, receiving and picking errors and paperwork mistakes. It is a risk cost of holding stock, and it grows with the amount held and the time it sits.
It is usually measured as a percentage of sales or of average inventory value. Dividing a year of shrinkage and write-offs by average inventory gives the risk bucket of the carrying cost rate.
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