Inventory Carrying Costs: A Breakdown

Total Inventory Carrying Cost is made up of a variety of factors. Industry specific percentages range from 12%-25% of total inventory. JRW has provided the breakdown for inventory carrying costs and how it could affect food manufacturers today.

JRW uses a conservative estimate of 12.5% of total inventory to compute inventory carrying costs.

This percentage is calculated as follows:

Cost of Money

This is the largest component of inventory carrying cost. It incorporates interest paid on money to finance inventory and “lost opportunity cost”. Lost opportunity costs are investments companies cannot take advantage of to grow their business, such as new trucks, more employees, or better technologies, because money is tied up in inventory.

The current interest paid on inventory is 5.75% based on the current business LOC borrowing rates reported by Bank of America. The conservative estimate of “Lost Opportunity Cost” is 1.25% compared to most benchmarks. JRW understands this is not tangible and errs on the side of under-reporting this number.

Taxes

A variety of factors contribute to total taxes paid on inventory but 2.5% is a CPA advised guideline. Also, by lowering the cost of ending inventory, companies can increase their COGS and save on taxes.

Storage

It does not matter if a business owns or leases their facility, they pay something for warehouse space. Less inventory leads to less inventory storage requirements and expenses. In situations where companies own warehouse space, less inventory creates capacity to rent extra space to third parties or use factoring and consignment tools to initiate additional revenue streams.

Obsolescence & Pilferage

You will lose inventory over a calendar year. Some of it is damaged, and some of it is just unaccounted for. Decreasing inventory reduces these two occurrences.

Insurance

Insurance premiums are typically calculated on inventory levels and will go down if inventory is reduced.

Curious about how inventory carrying costs affect your business? Reach out to us today.

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