What Is Inventory Shrinkage?
Most stock counts end the same way: a number that does not match the system.
Inventory shrinkage is stock your records still count but the shelf does not hold, after sales and logged wastage have been taken off. You find it by counting, and in an Indian kitchen or shop it usually builds from several small causes at once.
How to Work Out the Shrinkage Rate
Shrinkage rate = (recorded stock minus physical count) ÷ recorded stock × 100
Three habits decide whether the figure means anything.
- Count with the system frozen. A count taken while deliveries are still landing measures the coming and going, not the gap
- Value both sides the same way. Records at cost against a count priced at selling rates makes a gap out of nothing
- Run it per item, not just per outlet. A calm whole-kitchen rate can hide one item leaking ten times that
Note what the rate is measured against: the stock you hold, not your sales.
Where the Stock Actually Goes
Overseas guides put shoplifting at the top of the list. A kitchen’s gap usually has more sources than that.
Portioning drift is the quiet one: a ladle that creeps from 180ml to 200ml costs nothing visible and shows up only at the count. Spoilage, unlogged staff meals, breakages, short deliveries accepted without weighing and plain recording errors all feed the same number. Theft belongs on the list, but it is only one line on it.
The cause we see owners reach for first is theft, and it is rarely where the count points.
The fix is almost never a camera. It is tighter material consumption records and a count frequent enough to catch drift early.
Shrinkage vs Wastage
They overlap, and the difference decides what you do next.
| Aspect | Shrinkage | Wastage |
|---|---|---|
| Means | Stock unaccounted for | Stock spoiled or thrown |
| Known? | No, found at a count | Yes, seen when it happens |
| Logged | Never, by definition | Usually, if anyone bothers |
| Fix | Find the cause first | Reduce it at the source |
Logged wastage is not shrinkage, because the records already explain it. Unlogged wastage becomes shrinkage the moment someone counts.
Inventory Shrinkage Example
A 40-seat restaurant in Salem, Tamil Nadu, counts its store at the end of a month. Both figures are at cost.
| Item | Figure |
|---|---|
| Recorded stock | Rs.68,400 |
| Physical count | Rs.65,850 |
| Shrinkage | Rs.2,550 |
| Shrinkage rate on stock | 3.73% |
Note: this is an invented example for illustration only. The figures show the method, not a real outlet.
Rs.2,550 divided by Rs.68,400 gives 3.73% of stock held. Against the month’s food consumption of about Rs.1,90,000 the same loss is 1.3%, Published figures usually sit on sales or consumption rather than stock, so say which base you quote. Whether it is tolerable depends on what the outlet ran last month, and on which items the gap sits in.
What Shrinkage Costs Beyond the Stock
The missing stock is only the first cost.
Shrinkage usually lands in the cost of goods sold, inflating food cost and understating margin on anything you priced from what the stock was meant to cost. It also corrupts ordering: a system that thinks you hold stock you do not will let you run out mid-shift.
Then there is the tax. Goods lost, stolen, destroyed or written off can force back the input tax credit claimed on them, though whether that reaches you depends on what credit you held to begin with, and the write-off page sets out the rule and who it spares. The write-off page covers the mechanics.
Record-keeping is a separate duty. Rule 56(2) of the CGST Rules wants a stock account from every registered person except a composition dealer, and that account must itself record goods lost, stolen, destroyed or written off.
An inventory audit checklist gives you a repeatable count, and this piece on controlling food wastage covers the part you can see.
Catch the Leak Before the Count Does
A count tells you something went wrong. It rarely tells you what.
For restaurants, Petpooja POSS carries item-wise auto deduction and day-end inventory consumption reporting, which keeps the recorded side of the shrinkage sum hours old rather than weeks.
For retail businesses, Petpooja Invoice does the same job through barcode scanning and real-time stock tracking on a centralised inventory.
Count one high-value shelf this week and see if the gap is where you assumed. A food cost calculator will show what the extra consumption does to your food cost.
Frequently Asked Questions
The ranges you will find quoted are built on overseas retail, not on Indian SMEs. Track your own outlet month on month, because the direction is the signal, not the level.
Only if nobody recorded it. Spoilage logged as wastage is explained stock, so it never reaches the shrinkage figure, while the same spoilage thrown out quietly does.
Monthly for the whole store, weekly for the few items carrying most of the value. Counting everything weekly rarely survives a busy month.
Only where you claimed input tax credit in the first place, and plenty of small outlets never did. A composition dealer, and a restaurant billing at 5%, hold no credit to give back.
The loss reduces your profit through the cost of goods sold, but a large write-off needs evidence. Keep the count sheets and the reason, and ask your CA.
