What is inventory shrinkage? Causes and calculation

Ever feel like products are disappearing without a sale? You’re not imagining it.

This silent loss is called inventory shrinkage, and it can quietly cost your business more than you think.

From sneaky shoplifters and internal theft to simple scanning mistakes, inventory shrinkage is the silent profit killer most businesses underestimate. It appears as missing stock, mismatched data, and unexpected shortfalls, and the costs add up quickly.

In this blog, we break down what shrinkage is, how to calculate it, and, most importantly, how today’s technology, from RFID and mobile apps to remote video monitoring, helps you catch it.

Whether you’re running a warehouse, retail floor, or distribution center, this is one problem you can get ahead of.

Let’s get into it.

What is inventory shrinkage?

The definition of inventory shrinkage is when the stock on your records doesn’t match what’s actually on your shelves. 

Shrinkage can take many forms, including administrative mistakes, spoilage, vendor errors, or data mismatches. However, when you strip it all down, the most significant cause of shrinkage remains theft. 

Shrinkage appears in various forms, including administrative errors, spoilage, vendor mistakes, or mismatched data. Warehouse supervisors often point to misplaced stock and delayed system updates as common causes of inventory variance.

“According to warehouse supervisors, misplaced stock and delayed system updates are the most common causes of inventory variance.”

Sometimes it’s shoplifters. Often, it’s employees. At other times, it’s gaps in vendor deliveries or systems that don’t flag problems quickly enough. No matter the label, shrinkage usually results from things slipping through the cracks or from people taking advantage when no one is watching. 

According to the 10-10-80 rule, 10% of people will never steal, 10% will always steal, and the remaining 80% might, if they think they can get away with it.

It’s that 80% that causes most of the shrinkage. Not out of malice, but because the opportunity was there and no one was watching.

That’s why absolute protection means more than just tracking stock. It means having systems that see what’s happening in real-time, so you can act before small losses turn into major ones.

Inventory shrinkage calculation:

• Determine the recorded inventory.
• Determine the actual inventory.
• Calculate the difference between the recorded and actual inventory.
• Calculate the shrinkage rate.

Step #1: Determine recorded inventory: 

Before you lift a single box or scan a single barcode, stop. You need to determine what your system indicates is in stock.

Recorded inventory is the official, on-paper record of what you are supposed to have in stock. It’s the first step and is done before any physical inventory count or cycle count process begins.

If you’re an inventory manager, your first step is to pull the latest inventory report from your system and freeze all stock movement during that snapshot to ensure accuracy. Meanwhile, the ERP Admin checks that the report reflects clean, reliable data, with no sync errors, outdated entries, or missing SKUs. This data typically comes from:

• Inventory management systems (like NetSuite, SAP, TradeGecko, etc.)
• Accounting software (like QuickBooks, Xero).
• Physical ledgers or spreadsheets (in smaller operations).

Step #2: Determine actual inventory:

Actual inventory is the physical count of what’s actually in your warehouse, stockroom, or storefront. 

This step comes in after you’ve locked in your recorded numbers and paused operations. Most companies do this during off-hours, slow seasons, or at the end of the quarter.

This is the step where everything gets exposed: what your system says you have and what’s really on your shelves.

You are about to find out the value of the inventory you have on hand after misplaced stock, shrinkage, scanning errors, and theft. Here’s how you can start counting.

Break your space into zones. Assign teams:

Walk through your storage areas and divide them into logical zones (e.g., Aisle 1, Shelf B, Stockroom Section C). Assign one team or person per zone with clear responsibility for that area.

Use printed count sheets:

You can use a printed count sheet, as shown above, or scan the item name and expected quantity columns using a mobile device, or upload it to a mobile inventory app or scanner tool (such as Sortly, Zoho Inventory, or even Google Sheets on tablets).

Physically count every single item:

Have your team manually count the physical items in each location or use a scanner. Touch it, see it, count it, and log it directly on the sheet or device.

Freeze inventory movement during the count. No products in. No products out:

Temporarily pause order fulfillment, receiving, and transfers during the count. Post signs, notify the team, and restrict access as needed. Make it a non-negotiable.

Double-check critical SKUs, especially those with high value or high turnover:

Once the first count is complete, assign a supervisor or a second team to recount high-risk items. Compare both numbers. If there’s a mismatch, investigate before finalizing the data.

Step # 3: Calculate the difference: 

Now, immediately after both recorded and actual inventory numbers are finalized, you subtract the actual inventory value from the recorded inventory value.

You want to do this while everything is fresh, the data is locked, and movement is still paused. Inventory managers and finance teams often collaborate at this stage to reconcile discrepancies and identify the root cause of stock issues.

Step #4: Calculate the shrinkage rate:

To find your shrinkage rate, subtract the actual inventory from the recorded inventory.
Then divide that number by the recorded inventory and multiply by 100 to get the percentage.

Shrinkage (%) = (Recorded Inventory – Actual Inventory) ÷ Recorded Inventory × 100

For example

Let’s say your recorded inventory shows $10,000 worth of stock.
But when you count it, your actual inventory is only $9,200.

Shrinkage = ($10,000 – $9,200) ÷ $10,000 × 100
= $800 ÷ $10,000 × 100 = 8%

Your shrinkage rate is 8%, meaning that 8% of your stock is missing or unaccounted for.

And while 8% is high, even a small percentage matters, especially at scale.

From inventory count to shrinkage control. How does tech powers inventory accuracy?

• RFID tags and handheld readers.
• Barcode scanners and mobile count apps.
• Geofencing to manage zone-based audits.
• BI tools like Power BI or Tableau.
• AI to watch over counting areas.
• CCTV surveillance.
• Remote video monitoring.

RFID tags and handheld readers:

RFID (Radio Frequency Identification) tags are small chips with antennas that transmit product data when scanned by a reader. Handheld RFID readers are mobile devices that detect these tags using radio waves, even if the tags are out of sight or behind packaging.

Unlike barcodes, RFID doesn’t need to be visible, allowing staff to scan dozens or even hundreds of items in seconds, even through boxes or on shelves. This means faster stock checks, easier audits, and a better chance of catching missing or misplaced items before they become a problem. By tagging products and scanning them as they move through the store or warehouse, teams can identify shrinkage early and take prompt action.

How RFID tags and handheld readers help with shrinkage calculation:

Tag products at receiving or during manufacturing.

Assign data like SKUs, batch numbers, or locations.

Scan with handhelds across shelves, bins, or stockrooms.

Match scans with POS or ERP to spot gaps.

Investigate issues: theft, misplacement, or error?Set alerts for high-risk items or repeat-loss zones.

Barcode scanners and mobile count apps:

Barcode scanners use lasers or cameras to read product barcodes (usually UPC or QR codes).

Mobile count apps are digital tools (on phones or tablets) that let staff scan, count, and track inventory in real time, often integrated with inventory or POS systems.

Barcode scanners and mobile count apps might seem basic, but they’re one of the most effective frontline tools against shrinkage. They close the gap between what’s recorded and what’s real, catching errors, miscounts, and missing stock before they spiral into bigger losses.

How do barcode scanners and mobile count apps control inventory shrinkage? 

Label inventory with barcodes

Scan items during receiving, counting, or transferring

Sync scans to POS or inventory systems

Spot gaps by comparing scans to system counts

Track patterns in shrinkage by time or product

Geofencing to manage zone-based audits:

Geofencing adds a powerful layer of precision to shrinkage control by creating virtual boundaries around high-risk inventory zones, such as stockrooms, loading docks, or staging areas.

When someone enters or exits these zones, the system logs the event or triggers an alert, providing teams with real-time visibility into who accessed what and when. 

This is especially valuable during cycle counts, vendor deliveries, or after-hours activity, where traditional oversight often falls short. By connecting geofence data to audit logs and video footage, businesses can quickly identify anomalies, close process gaps, and reduce the likelihood of theft or human error going unnoticed.

BI tools like Power BI or Tableau:

BI tools like Power BI and Tableau control shrinkage by turning scattered data into clear, actionable insights. Instead of reacting to loss after it occurs, businesses can identify patterns such as which stores experience the most stock discrepancies, which products are most frequently missing, or when losses suddenly spike. These tools can be used at every phase:

• Daily, for live dashboards and alerts.
• Weekly or monthly, for trend analysis and reports.
• Post-incident, to investigate the causes of the loss.
• During audits, to back decisions with data.
• Pre-strategy, to guide more innovative planning.

These tools bring everything together: POS data, inventory logs, staff records, and even camera timestamps into one visual dashboard. 

AI to watch over counting areas:

AI connects directly to your inventory or ERP system through API or middleware. It runs quietly in the background, scanning for red flags like:

• Delayed data syncs.
• Duplicate SKUs.
• Unexpected inventory spikes.
• Mismatches between purchase orders and actual stock.

When something looks off, it sends real-time alerts to your ERP admin, so they no longer have to wait until the end of the month to catch errors. AI spots them as they happen.

CCTV surveillance:

Even finance experts agree that tech-backed visibility is key. As Leslie Simmons, Advanced Certified QuickBooks Advisor, puts it:

That’s where smart surveillance steps in. It does more than just record. AI-powered CCTV actively verifies what’s happening on the floor.

Smart surveillance does more than just record. AI-powered CCTV actively verifies what’s happening on the floor. Was that box scanned? Was it even there? Integrated video analytics catch what human eyes might miss and alert you when it matters most.

You get real-time visibility during critical moments, like:

• Cycle counts.
• Before and after transfers.
• Quarterly or annual audits.
• When anomalies or shrinkage patterns emerge.

In our latest blog, we unpack how video analytics can enhance every stage of inventory management. From spotting shoplifters to catching internal theft and triggering instant alerts, AI-powered video lets you respond before small losses become big problems.

Here’s a quick summary of how it works across key stages:

Shrinkage Cause	Al Surveillance Solution
Employee theft	Real-time behavior monitoring with Al detects under-ringing, pocketing, fake returns, etc. Facial recognition can link incidents to individuals. Heatmaps & dwell time help spot suspicious actions.
Administrative errors	Al-integrated POS & surveillance can cross-verify actions vs records, flagging anomalies in scanning, inventory entry, or transaction flow.
Shoplifting	Al-enabled video detects loitering, hiding items, or bag-switching. Alerts staff before theft occurs. Pattern recognition helps identify repeat offenders.
Vendor fraud	Al logs and matches delivery footage to invoices. Any mismatch in quantity or packages is flagged instantly. License plate tracking verifies authorized entries.
Inventory depletion	Al cameras track internal stock use in kitchens, service areas, or production zones. Any unrecorded depletion is flagged for reconciliation.
Vendor inaccuracy	Al compares received stock (via video and barcode scans) against purchase orders. Automated alerts for discrepancies in count or condition.
Damaged goods	Object-recognition Al detects dropped, mishandled, or dented products during handling. Helps document the damage caused and the timeframe for accountability.
Human mistakes	Al surveillance paired with POS systems can identify scanning errors, missed items, and staff confusion at self-checkouts or registers.
Spoilage	Al temperature sensors and video analytics detect improper storage or early spoilage signs. Alerts help prevent losses.
Unattributed loss	Al tracks stock movement, including samples, office use, or promotional giveaways. It can tag footage of unusual item removal or misplaced inventory.

Remote video monitoring:

AI cameras are excellent at detecting movement and unusual behavior, but prompt action is necessary when something suspicious is detected.

That’s where Remote Video Monitoring comes in. With a trained team watching live, you’re not just recording events, you’re stopping them in their tracks. You get:

• Live intervention when something’s off.
• Voice warnings that deter theft in real time.
• Instant alerts sent to your team.
• Verified video clips that support audits or investigations.

In warehouses, an alarm is triggered as soon as the camera AI detects behaviors such as people hovering near high-value stock without scanning, unauthorized entry into restricted zones, and unusual activity during shift changes or off-hours. 

In shopping malls, AI detects shoppers who repeatedly circle the same shelves, hide items in bags, strollers, or clothing, or use distraction tactics to shoplift.

Unlike basic CCTV, remote monitoring helps you respond in the moment, not after it’s too late. It’s a smarter layer of security that protects people, products, and profits.

Conclusion:

Inventory shrinkage results in lost revenue, broken trust, and missed opportunities. Whether it’s theft, human error, or tech blind spots, the causes often hide in plain sight.

But you don’t have to wait until the end of the quarter to find out something went wrong.

From RFID scans and barcode apps to AI-powered CCTV and remote video monitoring, today’s tools provide visibility at every stage, not just after the loss has occurred. The right system doesn’t just track your inventory. It identifies your weak spots, flags potential issues, and helps you respond in real-time.

Inventory shrinkage will always exist. But with the right tech in place, it doesn’t have to own you. Get a free demo and discover how live remote monitoring can help protect your warehouse, store, or site in real-time.