Inventory carrying costs are the costs businesses incur for holding and storing inventory. They are an important component of financial planning given that they are used to determine end product costs.
Broken down, inventory carrying costs comprise:
1. Capital costs. This is the cost of money tied up in inventory. It includes costs of acquiring the goods, interest on purchases, and the opportunity costs of holding inventory. This is usually the largest component of inventory carrying costs.
2. Storage costs. These include warehouse rent, mortgage payments, lighting, cost of moving materials, and air conditioning costs.
3. Inventory service costs. These include insurance on inventory and local government taxes.
4. Inventory risk costs. Inventory carries plenty of risks. Inventory risk costs are the costs associated items losing value, becoming obsolete, or going bad in the case of perishables.
Inventory carrying costs can cause a significant dent on a company’s bottom line. Minimizing them is critical.
