What is Inventory Shrinkage?
Inventory shrinkage is the loss of inventory between the moment goods are received and the moment they are sold, identified through a physical count compared to the recorded book quantity. Causes include shoplifting, employee theft, supplier fraud, damage, spoilage, expiry, and administrative errors. Shrinkage is recognized as an expense (typically in COGS) when identified.
How It Works
- Perform a physical inventory count and compare to book records.
- Investigate the discrepancy to identify cause and responsibility.
- Adjust the inventory account down to actual count: Dr Shrinkage Expense, Cr Inventory.
- Strengthen internal controls (cameras, access control, cycle counts, supplier vetting).
- Monitor shrinkage rate as a percentage of revenue to track effectiveness.
Saudi Context
Saudi retailers (supermarkets, electronics, fashion) track shrinkage as a key KPI alongside gross margin. Industry benchmarks in KSA hover around 1-2% of sales; above 2.5% signals control issues. ZATCA’s e-invoicing and integrated POS-inventory in Qoyod help reduce administrative shrinkage by tightening the link between sales, returns, and stock movements.
Example
A supermarket’s annual physical count finds SAR 110,000 of inventory missing against book records of SAR 4,200,000 sold. Shrinkage rate = 110,000 / 4,200,000 = 2.6%, above the 1.5% target. The supermarket books Dr COGS / Shrinkage SAR 110,000, Cr Inventory SAR 110,000 and tightens CCTV and staff bag-check policies.