Shrinkage occurs primarily in retail businesses, but can also apply to trades and manufacturing businesses.
Shrinkage occurs when the business fails to sell an item at its full price. The difference between a potential selling price of a product and the actual selling price is shrinkage.
Shrinkage can be caused by:
- theft by an employee;
- theft by a customer;
- errors in recording product details;
- not adequately checking goods when they’re received in the business;
- poor handling techniques leading to damage in stock;
- leaving perishable products out of refrigeration;
- over-ordering a product, thus, having product that needs to be discounted to sell it; and
- stock going out of date (this can be caused by poor stock rotation).