Carrying costs of inventory are all the expenses associated with holding inventory including maintenance, storage costs, warehouse costs, and scrap costs. Also called inventory costs, it is the cost incurred over a period of time by holding and storing inventory. This also includes insurance, opportunity costs, loss from theft and/or damage. An important profit measure for businesses is to determine the optimal inventory levels such the carrying or holding costs per unit of the inventory are being minimized.
Carrying costs are usually between 20% and 30% of a company’s inventory value, might go up to about 40% depending upon the item type. Calculating and reducing the carrying cost of inventory remains a critical component of any inventory management system.
Now you know the carrying costs definition and that its components may differ depending on nature or size of business, even may vary product to product. Here are some of the costs that carrying costs consist of for carrying costs calculation:
Primarily, carrying costs can be divided into four main categories:
There are a couple of ways in which you can reduce your carrying costs and save that much-needed cash for business requirements.
Clauses like duration that inventory will be kept in the storage space, the return of unused goods, carrying costs if the storage duration is extended, can help you make a concrete and proper contract that helps you save those extra bucks.
A cloud inventory management system will minimize carrying costs, streamline consignment selling, dropshipping, backordering of products , helping you maintain tight inventory control and avoid over-stocking.
Your inventory is a big part of your business and probably the most valuable asset. Holding inventory can be an expensive affair if it is not managed properly. If you want to keep your carrying costs to a minimum, then having a precise idea about your inventory levels is essential in order to maintain just the right amount of stock.