{"id":669,"date":"2019-07-08T19:41:00","date_gmt":"2019-07-08T19:41:00","guid":{"rendered":"https:\/\/www.shipbob.com\/uk\/blog\/inventory-carrying-costs\/"},"modified":"2025-11-25T19:36:21","modified_gmt":"2025-11-25T19:36:21","slug":"inventory-carrying-costs","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/uk\/blog\/inventory-carrying-costs\/","title":{"rendered":"Inventory Carrying Cost: Formula, Definition, and How to Save on Costs with ShipBob"},"content":{"rendered":"\n

Table of Contents<\/p>

** Minutes<\/p><\/div><\/div>\n

What is inventory carrying cost?<\/a><\/p>\n\n\n\n

3 reasons why carrying cost is important for ecommerce businesses<\/a><\/p>\n\n\n\n

4 critical components of carrying costs<\/a><\/p>\n\n\n\n

Using the inventory carrying cost formula<\/a><\/p>\n\n\n\n

How ShipBob keeps carrying costs low<\/a><\/p>\n\n\n\n

Conclusion<\/a><\/p>\n\n\n\n

Improve inventory management with ShipBob’s WMS<\/a><\/p>\n<\/div>\n\n\n\n

Businesses underestimate their total costs. And not just advertising and customer acquisition costs but logistics costs<\/a> as well.<\/p>\n\n\n\n

Similar to shipping and handling<\/a>, where many businesses record postage but forget to account for the total inventory costs of packaging, packing supplies, and the labour required to pack boxes, load products onto trucks, and other movement needed to fulfil orders, inventory costs beyond raw materials<\/a> and the cost of goods sold are often overlooked.<\/p>\n\n\n\n

That\u2019s where the inventory carrying cost comes into play.<\/p>\n\n\n\n

What is inventory carrying cost?<\/h2>\n\n\n\n

Inventory carrying cost is the total cost of all expenses related to storing or holding any unsold goods. Typical inventory carrying costs include warehousing, labour, insurance, and rent, as well as depreciating non-physical costs caused by damaged, expired, or out-of-date products.<\/span><\/p>\n\n\n\n

The total carrying cost of inventory makes up around 30% of total inventory costs and will depend on your products and storage needs, your total number of SKUs<\/a>, your location, your inventory turnover rate<\/a>, and whether you keep fulfilment in-house<\/a> or outsource it.<\/p>\n\n\n\n

3 reasons why carrying cost is important for ecommerce businesses<\/h2>\n\n\n\n

Ecommerce logistics<\/a> is complex and expensive, yet inventory management<\/a> affects your available capital, ability to meet customer expectations, and ultimately the future of your business. Learn the importance of carrying costs in ecommerce.<\/p>\n\n\n\n

1. Keep track of expenses<\/h3>\n\n\n\n

Carrying costs are a critical part of an ecommerce business\u2019s expenses. Inventory accounting<\/a>, or the process of accounting for changes in the value of inventory over time relies on properly tracking carrying costs.<\/p>\n\n\n\n

By knowing how many units you have on hand and how much your warehouse costs are for expenses like warehouse rent, staff salaries, depreciation, insurance, and other operational processes involved in storing inventory (or warehousing fees if you use a third-party ecommerce warehouse<\/a>), you can have an accurate picture of your carrying costs.<\/p>\n\n\n\n

2. Accurately calculate profit<\/h3>\n\n\n\n

The accuracy of the profit that your business records is directly dependent on the accuracy of your inventory carrying costs. Simply knowing the current inventory value doesn\u2019t acknowledge the inventory holding costs<\/a> associated with storing a product until a customer is ready to buy. When you understand your carrying cost, you can calculate your potential profit as well as how much cash you will have available for future production needs.<\/p>\n\n\n\n

Let\u2019s take this (oversimplified) example: If it costs you $5 to manufacture a product and you sell it for $10, then you can record a $5 profit, right? Well, if you forgot to account for the $1 it costs on average to store each unit before it sells, then you should actually add $1 more to the cost per item. This takes your profit margin from 50% to an actual margin of 40%.<\/p>\n\n\n\n

3. Make your business more efficient<\/h3>\n\n\n\n

If you\u2019re paying a lot of money to hold a level of inventory that\u2019s not selling quickly or much at all, the financial health of your business may be in jeopardy. For example, if you sell inventory within 180 days of buying it as compared to having it sit for only 90 days, your carrying costs may double.<\/p>\n\n\n\n

Tracking your carrying cost should help reveal areas of potential savings for your business across inbound and outbound logistics<\/a><\/span> and ways to optimise inventory storage and repurpose funds. If your business has poor inventory flow<\/a> and high carrying costs, you may want to identify products that are low sellers to be phased out, warehouse locations that can save you money, or even find different manufactures that can lower costs.<\/p>\n\n\n\n

4 critical components of carrying costs<\/h2>\n\n\n\n

To calculate the carrying cost of inventory, you need a few line items related to the cost of doing business (or the holding costs of inventory).<\/p>\n\n\n\n

1. Storage costs<\/h3>\n\n\n\n

Warehousing<\/a>, or the storing of physical goods before they are sold, is one of the top expenses of a business\u2019s inventory carrying cost. Warehousing can simply be rent for your warehouse, or the fees that a third-party charges. These can range from per-SKU or per-unit storage, to a fixed fee for each bin, shelf, or pallet used. If your sales fluctuate seasonally or month-over-month, storage costs may become costly during the low season.<\/p>\n\n\n\n

Many businesses choose to work with a third-party logistics service provider<\/a> or 3PL<\/a> company, who will store inventory in their warehouses for the merchant. Each SKU needs its own storage unit in the fulfilment centre<\/a>, and those costs will contribute to the carrying cost. Of course, more complex storage requirements such as temperature regulation or refrigeration will cost even more.<\/p>\n\n\n\n

2. Labor costs<\/h3>\n\n\n\n

If you manage order fulfilment<\/a> in-house, you need to invest in the workforce needed to receive, stow, organise<\/a>, pick, audit inventory<\/a>, and otherwise move product. You should ensure operations are streamlined with everything from an efficient layout to optimised picking lists<\/a> by bin location to help reduce costs.<\/p>\n\n\n\n

3. Cost of insuring and replacing items<\/h3>\n\n\n\n

Besides the inventory storage space<\/a> and labour needed to maintain inventory, carrying costs also factor in damaged, expired, destroyed, or out-of-season items, as well as insurance for storing inventory in the event that a disaster strikes and it\u2019s insured.<\/p>\n\n\n\n

4. Opportunity cost<\/h3>\n\n\n\n

The money spent on carrying inventory could be spent more productively in ways that help you scale your business like investing in capital cost. By reducing the inventory you hold, you free up both cash and time for better, more revenue-generating facets of the business \u2014 from building your customer community to marketing your products and getting them in front of new eyes.<\/p>\n\n\n\n

Using the inventory carrying cost formula<\/h2>\n\n\n\n

To use a simple total inventory carrying cost formula, first add up the following annual costs:<\/p>\n\n\n\n