Cost-cutting is a proven way to drive profits. Inventory carrying costs are one of the simplest areas to cut. If done properly, the exercise will be a simple and harmless one. However, you can't cut inventory costs without having a deeper understanding of your inventory. Inventory is simple enough on the surface, but there is plenty to learn when you look deeper to reduce carrying costs.
Carrying Cost Calculator
What is Carrying Cost?
Carrying cost is a valuable KPI when it comes to inventory. If you are writing a business plan, the carrying cost is an important factor to consider. It remains important even after your business is launched.
An inventory carrying cost is also known as a holding cost. It is essentially the cost of holding stock or inventory. The most basic definition would be calling it storage space costs. Depending on your order volume, you will need certain inventory levels to fulfil orders. That warehouse space comes with storage costs. It costs money to hold inventory and that impacts your cash flow. So, you need an accurate view of this number at all times.
Your carrying cost is critical in determining how much profit your current inventory can make. It is also useful in determining whether you should decrease or increase production to balance income and expenses or change inventory turnover rates. Your carrying cost should run between 20 to 30 percent of your total inventory storage value. It is a significant amount, which is why it is essential to account for the total carrying cost.
How To Calculate Inventory Carrying Cost
The inventory carrying cost formula you need;
Capital + Taxes + Insurance Premiums + Warehouse Costs + (Scrap - Recovery Costs 1) + (Obsolescence Costs - Recovery Costs 2) divided by the average annual inventory cost.
The formula might seem complicated, which is why a handy calculator removes the risk of error. You can use the inventory carrying cost calculation formula to work out yours manually. Or, you can use the inventory carrying cost calculator. All you need is the correct figures, and the calculator will do the maths for you.
You can also learn more about calculating your inventory cost here.
How To Use the Inventory Carrying Cost Calculator
The inventory carrying cost calculator couldn't be easier to use. You just need facts and figures like your capital cost, warehouse cost etc. and you can input them into the boxes provided and submit them for calculation when complete.
How QuickBooks can help
Inventory management software can do an excellent job handling the heavy lifting for you, and is a reliable way to keep track of both your overall inventory, as well as the facts and figures required to make these calculations. Visit our pricing page to find a plan that is right for your business or to get a free 30-day trial.
Visit our free tools and templates hub to find more free assets that can help you run and grow your business.
Frequently Asked Questions
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