Skip to main content

Methodology

Inventory Shrinkage Impact Planner methodology

Reconcile expected and counted inventory cost, recoverable value and the replacement sales needed to recover the net loss.
Duc Nguyen X.By Duc Nguyen X.· Founder, Margin101Last reviewed: View update historyMethodology

Educational only: Business decision support, not accounting, tax or legal advice.

Privacy: Calculations run locally; Margin101 does not receive your commercial inputs.

Update policy: Reviewed when formulas or official dependencies change.

Scope: Market-neutral small-business planning using your own assumptions.

1. Formulas and units

Gross Shrinkage Cost
grossShrinkageCost = expected inventory cost − counted inventory cost

Where

expectedInventoryCost
Expected inventory at cost (currency units, ex tax)Source: Business record
countedInventoryCost
Counted inventory at cost (currency units, ex tax)Source: Business record
grossShrinkageCost
Gross Shrinkage Cost (currency units, ex tax)Source: Calculated output
Net Shrinkage Cost
netShrinkageCost = gross shrinkage cost − recoverable value

Where

recoverableValue
Recoverable value (currency units, ex tax)Source: Business record
grossShrinkageCost
Gross Shrinkage Cost (currency units, ex tax)Source: Calculated output
netShrinkageCost
Net Shrinkage Cost (currency units, ex tax)Source: Calculated output
Shrinkage Rate
shrinkageRate = gross shrinkage cost / expected inventory cost

Where

expectedInventoryCost
Expected inventory at cost (currency units, ex tax)Source: Business record
grossShrinkageCost
Gross Shrinkage Cost (currency units, ex tax)Source: Calculated output
shrinkageRate
Shrinkage Rate (decimal rate)Source: Calculated output
Replacement Sales To Recover
replacementSalesToRecover = net shrinkage cost / contribution rate on replacement sales

Where

contributionRateOnReplacementSales
Contribution rate on replacement sales (decimal rate)Source: Business record
netShrinkageCost
Net Shrinkage Cost (currency units, ex tax)Source: Calculated output
shrinkageRate
Shrinkage Rate (decimal rate)Source: Calculated output
replacementSalesToRecover
Replacement Sales To Recover (currency units, ex tax)Source: Calculated output

Money inputs and outputs use the currency selected in the scenario without changing the canonical methodology. Rates, margins, utilisation and buffers are entered as percentages and converted to decimal values for calculation.

2. Worked example

Input assumptions

The worked rows below come directly from the exact engine and visible default fixture.

Expected inventory at cost
1,000 currency units/planning period, ex tax
Counted inventory at cost
900 currency units/planning period, ex tax
Recoverable value
20 currency units/planning period, ex tax
Contribution rate on replacement sales
0.4 currency units/planning period, ex tax

Calculation and outputs

  1. grossShrinkageCost

    grossShrinkageCost = expected inventory cost − counted inventory cost
    Expected inventory at cost
    1,000 currency units/planning period, ex tax
    Counted inventory at cost
    900 currency units/planning period, ex tax
    netShrinkageCost
    80 money

    Engine result: 100 money

  2. netShrinkageCost

    netShrinkageCost = gross shrinkage cost − recoverable value
    Expected inventory at cost
    1,000 currency units/planning period, ex tax
    Counted inventory at cost
    900 currency units/planning period, ex tax
    Recoverable value
    20 currency units/planning period, ex tax
    grossShrinkageCost
    100 money
    shrinkageRate
    0.1 percent

    Engine result: 80 money

  3. shrinkageRate

    shrinkageRate = gross shrinkage cost / expected inventory cost
    Expected inventory at cost
    1,000 currency units/planning period, ex tax
    Counted inventory at cost
    900 currency units/planning period, ex tax
    grossShrinkageCost
    100 money
    netShrinkageCost
    80 money

    Engine result: 0.1 percent

  4. replacementSalesToRecover

    replacementSalesToRecover = net shrinkage cost / contribution rate on replacement sales
    Expected inventory at cost
    1,000 currency units/planning period, ex tax
    Counted inventory at cost
    900 currency units/planning period, ex tax
    Contribution rate on replacement sales
    0.4 currency units/planning period, ex tax
    grossShrinkageCost
    100 money
    netShrinkageCost
    80 money
    shrinkageRate
    0.1 percent

    Engine result: 200 money

Example

The worked rows below come directly from the exact engine and visible default fixture.

Gross Shrinkage Cost
100 currency units
Net Shrinkage Cost
80 currency units
Shrinkage Rate
10%
Replacement Sales To Recover
200 currency units

The exact engine-derived outputs are shown in the labelled rows below.

Interpretation

Treat the net shrinkage result as a count reconciliation, not a diagnosis of theft, waste or process causes.

3. Validation and boundary checks

  • All values must be finite and inside the visible validation boundaries.
  • Rates are entered as percentages and calculations retain decimal precision.
  • Money and operational records use one consistent period and basis.
Expected inventory at cost minimum
expectedInventoryCost ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Expected inventory at cost maximum
expectedInventoryCost ≤ 10,000,000 currency units/planning period, ex tax — A higher value is rejected before calculation.
Counted inventory at cost minimum
countedInventoryCost ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Counted inventory at cost maximum
countedInventoryCost ≤ 10,000,000 currency units/planning period, ex tax — A higher value is rejected before calculation.
Recoverable value minimum
recoverableValue ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Recoverable value maximum
recoverableValue ≤ 10,000,000 currency units/planning period, ex tax — A higher value is rejected before calculation.
Contribution rate on replacement sales minimum
contributionRateOnReplacementSales ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Contribution rate on replacement sales maximum
contributionRateOnReplacementSales ≤ 1 currency units/planning period, ex tax — A higher value is rejected before calculation.

4. Assumptions and source classification

  • Demand, lead times, costs, tax and targets are supplied by the user.
  • No jurisdiction, supplier service level, industry benchmark or forecast is embedded.
  • The engine retains full precision and display formatting never feeds back into calculation.

This planner has no current policy-data dependency. Its commercial assumptions are user supplied. Registered family-level regression suites exercise the shared business-logic engine and worked-result reconciliation.

5. Limitations

  • Results depend on the quality and timing alignment of entered records.
  • The model does not replace inventory, accounting, tax, legal or financial advice.

This is educational decision support, not tax, accounting, legal or financial advice. Check the treatment of your actual transactions under the rules that apply to your business and seek qualified advice where appropriate.

6. Update and evidence policy

Registered family-level suites test formula invariants and example reconciliation; the release ledger records that coverage without claiming a separate oracle for every line of public copy. There is no official threshold or benchmark to refresh for this planner. Commercial inputs remain user-supplied because they vary by business and contract.

Change history

  1. : Initial public release of the Inventory Shrinkage Impact planner and methodology.

Related reading

Guides to interpret the decision and its assumptions.

Return to the planner