Shrinkage cost is the loss of goods or inventory due to shoplifting, employee theft, administrative errors, damage, or other causes. It is a key component of overall inventory management and should be factored into financial planning and budgeting by businesses. Put simply, shrinkage cost is an unavoidable expense for any retailer, one that can have serious consequences if not managed properly. With the right strategies in place, however, companies can dramatically reduce their shrinkage and increase their profits over time.