Shrinkage is the gap between the stock your records say you own and the stock you can actually count. Some of it is theft. Much of it is paperwork: a carton signed for but never delivered, a sale rung up under the wrong product, a breakage nobody recorded. Whatever the cause, the effect is the same. Under IAS 2, inventory losses are recognised as an expense in the period they occur, which means shrinkage comes straight out of profit.
URA's own EFRIS guidance lists comparing stocked items against sales as a way of detecting theft. That comparison is only possible if the records on both sides are accurate, so closing the gaps is as much about process as about locks.
Gap 1: receiving
The lorry arrives, the driver is in a hurry, and someone signs the delivery note against the invoice without counting. A short delivery becomes a phantom quantity in the system that will show up as a loss at the next count, by which time the supplier will not entertain a claim.
Control: receive against a goods-received note, count every line, and record batch and expiry where relevant. The Pharmaceutical Society of Uganda's retail standards require formal delivery notes detailing product, quantity, batch number and expiry date for every purchase, and the same discipline suits any shop. Query shortages on the day.
Gap 2: the back store
Stock in a store room is out of sight of customers and often out of sight of the owner. The pharmacy standards require that staff with access to the store be authorised by the supervising pharmacist and that their names be displayed at the store entrance, with a separate lockable area for expired, damaged and rejected products.
Control: limit who holds keys, log movements from store to shelf as transfers rather than letting stock drift, and count the store on a shorter cycle than the shop floor.
Gap 3: the till
Most till-side shrinkage is not a cashier pocketing cash. It is a product sold as a cheaper one because the barcode would not scan, a discount applied without authority, a "void" of a completed sale, or a return accepted without the goods coming back.
Control: every product carries a scannable code so the right item is sold; discounts above a threshold need a manager's approval; voids and returns are reported daily by cashier. A sudden rise in voids on one till is the earliest signal you will get.
Gap 4: transfers and branches
Stock sent from one branch to another is in limbo until the receiving branch confirms it. A transfer that is "sent" but never "received" inflates one branch and starves the other, and the loss is discovered only when both are counted.
Control: two-step transfers, where the receiving shop confirms the quantities that actually arrived, and a weekly list of transfers still in transit.
Gap 5: damage and expiry that nobody records
A dropped bottle, a torn bag of flour, a product past its date: staff throw it away to keep the shop tidy, and the system still thinks it is on the shelf.
Control: make recording damage easy and blame-free. An adjustment with a reason takes thirty seconds; an unexplained variance at month end takes an afternoon of argument. URA's EFRIS guidance notes that the system provides stock adjustment to remove damaged stock, burnt stock or any other adjustment with reasons, so the same record serves your tax position.
Measure it as a percentage of sales
Add up the value of all stock adjustments in a month (shortfalls at counts, damage, expiry, unexplained) and divide by sales for the month. Track that percentage month on month by branch. The absolute figure matters less than the trend and the comparison between branches: a branch whose shrinkage is double the others has a specific problem that is worth a visit.
Account for what you cannot explain
Not every variance will find a reason. Post the unexplained balance as a loss, with the count sheet attached, rather than letting the system carry stock that does not exist. Record keeping is a legal obligation as well as good practice: under the Tax Procedures Code Act, as summarised by RSM Uganda, records must allow tax liability to be readily ascertained and be retained for five years, and failing to keep proper records is a penal offence.
Tell the team what you measure
Shrinkage falls when staff know it is measured and why. Share the monthly percentage, recognise the sections and branches that improve, and treat most variances as process failures to be fixed rather than accusations to be made. The controls above are not about distrust; they are about making the honest path the easy one.
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