Book count 120, physical count 112, unit cost $3.15: shrink is $25.20, or 6.67% of book value
Inventory shrink is the gap between what your records say you have and what you actually count, multiplied by what each unit cost you. If the books show 120 gallons of whole milk, the count finds 112 and each gallon cost $3.15, you are short 8 units, so shrink is 8 × $3.15 = $25.20. Book value for that item is 120 × $3.15 = $378.00, which makes the shrink rate $25.20 ÷ $378.00 × 100 = 6.67%.
The calculator's example counts five items at once. Four are short (milk, eggs, coffee and granola bars) for total shrink of $47.44 against a book inventory value of $2,722.13, a rate of 1.74%. Bottled water came in 2 packs over the books, worth $8.50, which is shown separately as an overage instead of being subtracted from shrink. With a 2% target, the allowed shrink is $54.44, so this count is $7.00 under it. Below you will find the step-by-step math, the two ways to express a shrink rate, how overages and net difference work, how to read the accounting, and how to find which items to fix first.
When should you calculate shrink?
- After a physical count at month end or quarter end: unit differences alone are hard to compare because a $0.85 item and a $7.45 item hurt differently. Converting each difference to dollars lets you rank them on one line.
- When closing the books: the difference between book inventory and the physical count has to be written off, and the size of that adjustment is exactly the shrink figure.
- When hunting for causes: tagging each item as damage, expiry, theft or record error shows which cause costs the most. If a handful of items drive most of the loss, fix storage and ordering for those first.
- When comparing against a target or the industry: you can check whether shrink rose since the last count or went over your own benchmark. Industry surveys usually state shrink against sales, so switch the basis to sales before comparing.
How to calculate inventory shrink, step by step
Work item by item, then add up. Using the whole milk from the example:
| Step | Calculation | Whole milk example |
|---|---|---|
| 1. Quantity difference | Book quantity − counted quantity | 120 − 112 = 8 short |
| 2. Shrink | Short quantity × unit cost | 8 × $3.15 = $25.20 |
| 3. Book inventory value | Book quantity × unit cost | 120 × $3.15 = $378.00 |
| 4. Shrink rate | Shrink ÷ book value × 100 | $25.20 ÷ $378.00 × 100 = 6.67% |
| 5. Total | All shrink ÷ all book value | $47.44 ÷ $2,722.13 × 100 = 1.74% |
Use what you paid for the item (landed cost), not the shelf price. Shrink is the cost of the stock you can no longer sell. Multiplying by the retail price would fold in the margin you never earned and overstate the loss. The five example items look like this:
| Item | Unit cost | Book | Counted | Difference | Shrink | Of book quantity |
|---|---|---|---|---|---|---|
| Whole milk (gal) | $3.15 | 120 | 112 | 8 short | $25.20 | 6.67% |
| Eggs, dozen | $2.80 | 40 | 38 | 2 short | $5.60 | 5.00% |
| Ground coffee (per lb) | $7.45 | 12.5 | 12.2 | 0.3 short | $2.24 | 2.40% |
| Granola bars (box) | $3.60 | 240 | 236 | 4 short | $14.40 | 1.67% |
| Bottled water (24-pack) | $4.25 | 300 | 302 | 2 over | $0.00 ($8.50 over) | n/a |
| Total | n/a | n/a | n/a | n/a | $47.44 | 1.74% by value |
The last column only makes sense within one item. Milk is counted in gallons and coffee in pounds, so adding quantities and dividing gives a meaningless number. Compare items by dollars, and report the total as a dollar-weighted rate.
What should you divide shrink by?
The same loss gives different rates depending on the denominator. The calculator lets you pick the basis.
| Basis | Formula | Example ($47.44 shrink) | Use it when |
|---|---|---|---|
| Book inventory value | Shrink ÷ book inventory value × 100 | $47.44 ÷ $2,722.13 = 1.74% | You want to know how much of the counted stock disappeared |
| Sales | Shrink ÷ sales for the same period × 100 | $47.44 ÷ $6,000 = 0.79% | You are comparing with earlier periods or industry surveys |
When you use sales, take sales between the previous count and this one, because the loss built up over that stretch. The National Retail Federation's 2023 National Retail Security Survey reports an average shrink rate of 1.6% for fiscal 2022, up from 1.4% in fiscal 2021, and applies that rate to total 2022 retail sales to reach $112.1 billion in losses. Your own mix of products, store type and theft exposure will differ, so treat it as a rough yardstick rather than a goal. Some retailers record shrink at retail price, so a cost-based rate like this one can come out lower than survey figures.
There is no official target rate. The calculator's 2% is an example. Look at your last few counts and your category (fresh food spoils, small high-priced goods walk out the door) and set a benchmark you can defend. With a target entered you get the allowed shrink (basis × target %) and the dollars above or below it. In the example, 2% of $2,722.13 allows $54.44, so the $47.44 loss is within target with $7.00 to spare.
What if the count is higher than the books?
An item counted above the books is not shrink, so it is not added to the loss. It appears as an overage and only offsets the net difference, which is book value minus physical count value. In the example the water overage is $8.50 and the net difference is $2,722.13 − $2,683.19 = $38.94, or 1.43% of book value.
Overages are kept apart because they usually point to a different problem: a receipt that was never entered, a return posted twice or a similar product counted as the wrong one. Missing milk and extra water do not cancel each other out. Check the cause for each item, fix the records and recount if needed.
Accounting: how shrink reaches the books
Under IFRS, IAS 2 Inventories says inventories are measured at the lower of cost and net realisable value, and that the amount of any write-down to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs (IFRS Foundation summary of IAS 2). It does not split losses into normal and abnormal. In practical terms, a count shortfall reduces inventory on the balance sheet and increases an expense in the period you find it.
| Item | Cause | Calculation | IAS 2 treatment |
|---|---|---|---|
| Inventory shrink (loss) | Theft, damage, spoilage or record errors leave fewer units than the books show | (Book qty − counted qty) × unit cost | Expensed in the period the loss occurs |
| Write-down to net realisable value | Prices fall or goods become obsolete, so they will sell for less than cost | Counted qty × (unit cost − net realisable value) | Measured at the lower of cost and net realisable value; expensed in the period of the write-down |
This calculator covers the first row only. Because the standard does not set a numeric test for what counts as normal, the calculator does not split shrink into normal and abnormal parts in this language. US GAAP, tax rules and your own policies can differ from IFRS, and they are not covered here. Which accounts to use is a question for your accountant.
Start with the items that cost the most
Shrink tends to concentrate. The bar chart under the calculator ranks items by dollars lost, with each item's share and a running cumulative share.
| Rank | Item | Shrink | Share | Cumulative |
|---|---|---|---|---|
| 1 | Whole milk (gal) | $25.20 | 53.1% | 53.1% |
| 2 | Granola bars (box) | $14.40 | 30.4% | 83.5% |
| 3 | Eggs, dozen | $5.60 | 11.8% | 95.3% |
| 4 | Ground coffee (per lb) | $2.24 | 4.7% | 100.0% |
Milk and granola bars together make up 83.5% of the loss. Eggs were short by only 2 units, but at $5.60 they rank third, while 4 granola boxes outweigh them because of the higher count and unit cost. A small unit difference on an expensive item deserves a look, and concentrating on the items that make up the first 80% of the loss is usually the cheapest way to bring the rate down.
What to check for each shrink type
Pick a type for each item and the shrink-by-type bar adds up the dollars per cause. Leave an item as unknown cause until you find out, then change it and look again.
| Type | Common causes | What to check |
|---|---|---|
| Damaged | Breakage in transit or on the shelf, temperature excursions | Receiving checks, fridge and freezer logs, display method |
| Expired | Over-ordering, first-in first-out not followed | Order versus sales volume, rotation, markdown timing |
| Theft/loss | Shoplifting, employee theft, loss in delivery | Blind spots, access and write-off records, delivery sign-off |
| Record error | Receipts or returns never entered, wrong item scanned, case versus each confusion | Receiving documents, point-of-sale records, unit of measure |
| Unknown | Not yet traced | Track inbound and outbound movement of those items until the next count |
Common mistakes
- Mixed units: entering the cost of a case but counting single units inflates shrink by the number of units per case. Keep cost and both quantities in one unit per item.
- Using selling price: shrink is measured at cost. Retail price overstates the loss.
- Ignoring movement during the count: stock received just before the count and not yet entered, or sold items still on the floor, create false gaps. Pause receiving and sales entry or note the cutoff time.
- Letting overages erase losses: another item's overage does not make up for a shortage. The calculator reports shrink and net difference separately.
- Adding quantity rates: percentages from items counted in gallons and pounds cannot be summed. Use the dollar-weighted rate for totals.
- Mismatched periods: dividing a month of shrink by a year of sales makes the rate look much smaller than it is.
Limits
- The tool works only from the book quantities, counted quantities and unit costs you enter. Your costing method (FIFO, average cost) decides the unit cost, which you must supply.
- It does not calculate write-downs to net realisable value. Items that will sell below cost need a separate calculation.
- How shrink is classified and booked depends on your accounting policy and jurisdiction. Confirm with your accountant.
- Up to 20 items. Nothing you type is saved or sent to a server. To come back to a count, keep the address from Copy link. Item names and quantities are placed after the # only.
As of The IFRS and NRF pages were opened on 2026-10-16. The IFRS Foundation page is a summary of IAS 2, not the full numbered text. The NRF figure is the FY2022 survey result and is not a target for any particular store.
Sources
- 01IFRS Foundation: IAS 2 InventoriesInventories are measured at the lower of cost and net realisable value; the write-down amount and all losses of inventories are recognised as an expense in the period the write-down or loss occurs
- 02National Retail Federation: National Retail Security Survey 2023Average shrink rate 1.6% in FY2022, up from 1.4% in FY2021; applied to total 2022 retail sales it is $112.1 billion
Frequently asked questions
How do you calculate inventory shrink?
Subtract the counted quantity from the book quantity, then multiply the shortfall by the unit cost. With 120 on the books, 112 counted and a $3.15 cost, shrink is 8 × $3.15 = $25.20. For several items, add up the shrink for each short item.
What do you divide shrink by to get the rate?
To see how much of the counted stock disappeared, divide by book inventory value (book quantity × unit cost). To compare with earlier periods or industry surveys, divide by sales between the previous count and this one. The example shrink of $47.44 is 1.74% of the $2,722.13 book value and 0.79% of $6,000 in sales.
What if the physical count is higher than the books?
That is not shrink, so it is not added to the loss. The calculator shows it as an overage and offsets it only in the net difference between book value and physical count value. Overages often come from receipts that were not entered or items counted as the wrong product, so find the cause and correct the records.
Should I enter selling price or cost?
Enter cost, meaning what you paid for the item. Shrink is the cost of stock you can no longer sell, and using the selling price adds margin you never earned, which overstates the loss.
How is inventory shrink treated in the accounts?
Under IFRS, IAS 2 says the amount of any write-down to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. It does not separate normal from abnormal losses. US GAAP, tax rules and your own policy can differ, so confirm the accounts with your accountant.
What is the difference between shrink and a write-down?
Shrink is a loss of quantity: units that are missing because of theft, damage, spoilage or record errors. A write-down to net realisable value is a loss of value: the units are there but will sell for less than they cost. This calculator covers shrink only.
What shrink rate should I aim for?
There is no official figure. The 2% in the calculator is an example, so use your past counts and product mix. For context, the National Retail Federation's 2023 survey reported an average shrink rate of 1.6% in fiscal 2022, up from 1.4% in fiscal 2021.
Are my items and quantities saved or sent anywhere?
No. Nothing is saved and nothing is sent to a server. To reopen a count, keep the address from Copy link. Item names and quantities are placed after the # in the address, which browsers do not send to the server when the page loads.