July 1, 2022

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How to Calculate Shrinkage

3 min read

Remember your math lessons? The “difference” is the answer to a question about subtraction. It’s what makes one number different from another in terms of value. 

“Difference” is also the value of shrinkage in retail. Shrinkage is the difference between the original value of the inventory, and the value of the actual items sold. Whatever that difference is is a revenue loss to the company. 

Because of this, the ability to calculate shrinkage in retail is a significant part of loss prevention. A loss prevention officer, when helping to calculate how much the company can afford to lose, should also have an idea of how much it will cost. It also helps loss prevention officers set realistic, concrete goals for reducing shrinkage. 

How to Calculate Shrinkage

To make things simpler, let’s go with one retail item only: plates.

Start with addition. Add up all the plates you should have in inventory, based on your deliveries. Let’s say we have 1,000 plates. Assign a value to each plate. For the sake of simplicity, let’s make it $2 per plate. 

Move on to multiplication. 

1,000 plates x $2 / plate = $2,000 original inventory worth

Let’s say you sold every plate in your inventory. So you sit down and calculate the worth of what you just sold. Altogether, you discover you only earned $1,750 from selling the plates. 

Finally, subtraction.

$2,000 original inventory worth – $1,750 final inventory worth = $250 retail shrinkage

So how many plates were you actually able to sell at their full worth?

$1750 final inventory worth / $2 dollars per plate = 850 plates

Instead of selling 1,000 plates at $2 each, how much did you actually sell each plate for?

$1,750 final inventory worth / 1,000 plates = $1.75 per plate

Losing $0.25 on each plate may not seem extremely high, but retailers keep prices low and depend on bulk selling to make a profit. Despite small per-item losses, it can lead to overall profit losses that take down a store. 

Calculate percentages of shrinkage. 

Retailers calculate percentages of shrink by comparing the worth of the loss to the worth of the total sales. 

Let’s break it down.

Total shrinkage: $250 difference

Total plate sales: $1,750 final inventory worth

($250 shrinkage / $1,750 final inventory) x 100 = 14% shrinkage

So the shrinkage percentage is not how much of your final inventory was lost. Instead, it’s how much the loss was compared to your gain. So how do you lower your shrink percentage?

  • Sell more. Instead of selling $1,750 worth of plates, sell $3,500 worth of plats.

($250 shrinkage / $3,500 final inventory) x 100 = 7% shrinkage

  • Lose less. Instead of losing $250 to shrinkage, lose $100.

($100 shrinkage / $3,500 final inventory) x 100 = 2% shrinkage

Translate Calculation into Strategy

Knowing how to calculate shrinkage is important because it deals directly with the kind of strategy loss prevention personnel will invest in. They can recommend the increase of marketing and sales to the department in charge. They can also directly implement policies to lower the value of shrinkage. This includes monitoring employee satisfaction and innovating new ways to prevent retail theft and fraud.

Once a loss prevention officer is able to properly calculate shrinkage and understand how the numbers work, they will find themselves able to see the bigger picture of profit in retail. It will also become a baseline for clear goal-setting and the path to identifying specific strategies.