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How to fix inventory shrinkage in QuickBooks Online

A man tracking inventory with a scanner and tablet.

One of the biggest problems manufacturers face is disappearing inventory. Retailers lose up to 1.33% of total sales because of inventory shrinkage, costing a collective $46.8 billion annually. 

Fortunately, reducing inventory shrinkage on QuickBooks Online is easy.

If your balance sheet isn’t matching up, this guide will tell you how to manage and prevent inventory loss on QuickBooks for warehousing. 

What is inventory shrinkage in QuickBooks Online?

On QuickBooks, shrinkage occurs when you make an inventory adjustment.

Unfortunately, after receiving inventory, there is currently no way to remove shrinkage on QuickBooks Online directly.

However, you can pull records of adjustments in the following steps:

  1. Find the search icon and click Advanced search.
  2. Search for Inventory adjustment account from the drop-down menu.
  3. Select the account where the shrinkage occurred.
  4. Click All transactions from the second drop-down menu.
  5. Select Inventory quantity adjustment.
  6. Select Search and remove the unwanted adjustment.
  7. Click Delete
  8. Confirm by clicking Yes.

Understanding inventory shrinkage

Inventory shrinkage happens when fewer products are in your inventory than listed in your accounting records. 

A loss of inventory equates to a loss of profits. As such, your book inventory (the number of items you should have) must equate to your physical inventory (the number of items you actually have).

Being diligent about your inventory accounts keeps your business as profitable as possible.

Reasons for inventory shrinkage

Below are the most common reasons for inventory shrinkage.


Consumer theft occurs when non-employees enter your physical store and take your products without paying for them.

Simple ways to prevent shoplifting include hiring security personnel, installing CCTV cameras, or reinforcing your displays with locks. 

Employee theft

Shockingly, employee theft occurs more frequently than consumer theft.

Prevent employee theft through comprehensive warehouse management and strict protocols.

Administrative errors

Businesses without robust inventory management software are prone to manual input errors. 

The good news is that you can easily prevent miscounting and human error through automation.

Supplier fraud

Unfortunately, supplier fraud is common when suppliers invoice companies for a set amount of materials only to send an incomplete shipment.

You can prevent supplier fraud by improving risk management systems and tightening payment approvals.

Negative impacts of inventory shrinkage

The most apparent consequence of inventory shrinkage is a loss in profit. Depending on the extent of the inventory loss, it could easily be recoupable.

Other times, the negative impact is severe and can lead to other consequences, including: 

  • Reduced purchasing capacity for extra inventory.
  • Decreased capital wages and employee retention.
  • Higher spending for security measures.
  • Loss of loyal customers.
  • Forced increased prices and fewer sales.

How to calculate inventory shrinkage

Calculating your inventory shrinkage rate can put your losses into perspective.

Fortunately, the formula is relatively straightforward. Just follow these steps.

Shrinkage accounting formula

  1. Subtract physical inventory units from book inventory units. This formula will give you the number of units lost.
  2. Divide the number of units lost by your inventory value (book inventory units) to get your shrinkage rate.

To illustrate this, suppose you have 1,000 book inventory units and 965 physical inventory units. You will have lost 35 units. When divided by 1,000 book inventory units, you have a shrinkage rate of 3.5%.

A stock shrinkage of 35 products may seem like a lot. Unfortunately, losing 35 physical inventory units is not impossible or even improbable.

Consider the following scenario:

Suppose you have a new hire who is not as trustworthy as you assumed. This hire takes five of your units home. In addition, your supplier committed fraud, leaving 12 units out of your shipment. Then, because of the sale season, your tired employees miscounted 18 units, leading to a total loss of 35 stock items.

How to prevent and reduce inventory shrinkage

If you’ve experienced inventory shrinkage in the past, you’ll be pleased to know that there are actions you can take to prevent it.

Give products SKUs and UPCs

Because you can scan stock-keeping units and universal product codes, physical counts and identifications are much more manageable.

Integrating these codes into QuickBooks Online only takes a few clicks.

Implement a double-check system

Unfortunately, no one is immune to human error, including your most experienced employees.

Assigning an additional employee to oversee counts through a double-check system can reduce shrinkage and ensure that your numbers are accurate.

Vet potential employees thoroughly

Reduce employee theft by enforcing rigorous screening and background checks for new hires. 

In addition, dedicate a portion of your training program to educating employees regarding shrinkage and how to prevent it. 

Track inventory shrinkage over time

Sometimes, the reasons behind inventory shrinkage are not obvious.

Tracking your inventory shrinkage rate over time can help you identify problem areas.

Automate inventory management

Gone are the days when managing your inventory list on a spreadsheet was the most effective tracking method.

Now, you can automate counts and inventory reports with management software that integrates with your checkout systems.

Reliable inventory management software provides real-time updates.

Furthermore, this software can send custom notifications regarding product losses and when items enter or exit your warehouse.

Plan for busy periods

Stock shrinkage most commonly occurs during busy periods, so you’ll want to be prepared. 

During holidays and sales, consider ordering a higher number of goods. In addition, you can increase security measures temporarily or assign more employees to double-check counts.

Key takeaways

Inventory shrinkage affects plenty of manufacturing businesses that use QuickBooks.

Factors like shoplifting, employee theft, lack of management software, and human error can all negatively impact your inventory status.

Fortunately, there are many ways you can prevent shrinkage, for instance:

  • Calculating your inventory shrinkage rate puts your losses into perspective and informs how you take preventative actions.
  • A few ways to prevent inventory losses include automated software, additional employee training, peak season preparation, and product scanning.

If your QuickBooks Online plan isn’t cutting it, try Method:CRM, a comprehensive CRM software with robust accounting and inventory capabilities.

Use Method to track your inventory as it moves across your warehouse to avoid costly miscounts.

Inventory shrinkage FAQs

How do I fix inventory problems in QuickBooks?

With QuickBooks, simply adjust your inventory counts to fix inventory problems. However, sometimes shortages cause negative inventory in QuickBooks. You can remedy negative inventory by eliminating every occurrence of incorrect quantities on hand (QOH). But if there are extensive errors, consider starting a new data file instead.

How do I adjust inventory in QuickBooks Online?

To adjust your inventory or QOH on QuickBooks Online, select New and click on Inventory qty adjustment. Input the adjustment date and select the appropriate account from the Inventory adjustment account drop-down menu. Then, select the products you want to adjust from the Product field and enter any changes in inventory quantities. Also, enter any new details for each product in the Memo field before clicking Save and close.

How do I delete shrinkage in QuickBooks?

QuickBooks Online automatically creates inventory shrinkage for each account and records your adjustments. If you want to delete shrinkage, click on the search icon and select Advanced search. From the Inventory adjustment account drop-down menu, click All transactions. Then, click Inventory quantity adjustment and select Search. Remove the intended adjustments and click Delete.

Start a free trial of Method:CRM today!

Image credit: Tiger Lily via Pexels

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