In financial accounting, the term inventory shrinkage is the loss of products between point of manufacture or purchase from supplier and point of sale. The term shrink relates to the difference in the amount of margin or profit a retailer can obtain. If the amount of shrink is large, then profits go down which results in increased costs to the consumer to meet the needs of the retailer.

In retail terms, shrinkage refers to a company's percent loss resulting from damage, product expiration and theft of unsold products. Retail shrinkage can happen anywhere along the production and sale chain, including at the factory, in transit or at the retail location.

You can calculate retail shrinkage by dividing the value of goods lost to shrinkage by the total value of goods that are supposed to be in the inventory.

Shrinkage =

( Total value of the goods that you are supposed to have in your inventory - Total value of the goods that is physically stocked in your inventory )

/ Total value of the goods that you are supposed to have in your inventory.

i.e. Shrinkage = (Book stock - Actual Stock) / Book Stock

= Total Value of goods lost / Total value of the goods that you are supposed to have in your inventory