Inventory shrinkage is a shortage between the stock the records say should exist and the quantity or value found through reconciliation. Possible causes include theft, damage, spoilage, missed movements and counting or data-entry errors. The difference is evidence to investigate, not proof of a particular cause.
State whether the measure uses units or value
For a single SKU at a defined count time:
Shortage units = recorded units − physical units
Shortage rate = shortage units / recorded units × 100
If records show 100 units and the count finds 96, the shortage is four units, or 4% of recorded units. If each costs $10, the cost-valued shortage is $40. If physical quantity exceeds recorded quantity, report the overage and investigate it rather than calling it negative theft.
Across unlike products, value shortages at a consistent cost basis. Adding units of flour, gloves and furniture does not create a meaningful portfolio loss measure. A revenue-based shrinkage ratio is another metric entirely:
Revenue-based loss ratio = recognized inventory loss at cost / net revenue × 100
Do not compare a percentage of revenue with a percentage of inventory or food cost as though they use the same denominator.
A worked financial example
Assume an operation records $1,000 of inventory losses in a week and $40,000 of net revenue. The revenue-based loss ratio is 2.5%. If that same weekly loss continued for 52 weeks, the annualized scenario would be $52,000. That is an illustrative run rate, not an industry benchmark.
The $52,000 loss does not mean average inventory rose by $52,000 or that annual carrying cost rose by the same amount. Inventory balance, replacement purchases, recognized losses and carrying expense are separate quantities.