Shrinkage is a business term used to describe the discrepancy between the inventory that a company owns and what it should actually have. It’s important for businesses to keep track of their physical inventory in order to remain profitable. The formula for calculating shrinkage takes into account the starting inventory count, purchases, sales, and other losses (theft, damaged goods, etc.) to determine the end inventory count. By subtracting the final inventory count from the expected total, businesses can determine exactly how much shrinkage they are dealing with—and begin to look at preventative solutions to protect their bottom line.