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Fulfillment & inventory

Inventory Carrying Cost Calculator

Stock sitting on a shelf costs money every month, even before it sells. Add up the cost of capital, storage, insurance, handling and shrinkage to see your annual and monthly carrying cost, your carrying cost rate and the cost per unit.

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Inventory
$

Typically (opening + closing inventory) ÷ 2, valued at what you paid, not retail price.

Adds a per-unit carrying cost.

Annual costs

Enter yearly figures. Include each cost once only.

%

Your interest rate on borrowing, or the return you could earn on the cash elsewhere.

$

Rent, utilities or 3PL storage fees attributable to inventory.

$
$

Labour and equipment for moving and counting stock, if not already in storage.

%

Expected yearly loss from theft, damage, expiry or items that can no longer be sold at cost, as % of inventory value.

$

For example inventory taxes or inventory software.

Results

Fill in the fields marked * to see your results here. Or load the example to see how it works.

Estimate only. Not a quote, tax advice or legal advice.

The carrying cost formula

Capital cost = Average inventory value × Cost of capital %
Shrinkage & obsolescence = Average inventory value × Allowance %
Annual carrying cost = Capital + Storage + Insurance + Handling + Shrinkage & obsolescence + Other
Monthly carrying cost = Annual carrying cost ÷ 12
Carrying cost rate = Annual carrying cost ÷ Average inventory value
Cost per unit = Annual carrying cost ÷ Average units on hand

The four classic components are:

  • Capital cost - interest paid, or the return given up, on cash tied up in stock. It is often the largest component.
  • Storage space - rent, utilities and warehouse or 3PL storage fees attributable to inventory.
  • Inventory service costs - insurance, inventory taxes where they apply, counting and inventory software.
  • Inventory risk - shrinkage (theft, loss, damage) and obsolescence (expiry, seasonality, end of line).

Worked example

Illustrative figures for a retailer holding an average of $120,000 of stock (8,000 units) at cost:

Cost of capital 9% × $120,000$10,800
Storage$14,400
Insurance$1,800
Handling$6,000
Shrinkage & obsolescence 3% × $120,000$3,600
Annual carrying cost$36,600 (30.5% of inventory value)
Monthly$3,050
Per unit$4.58 a year, about $0.38 a month

Every unit that sits for a year costs this business about $4.58 just to keep. For a product with a $6 margin, a year on the shelf erases most of the profit.

How to use the result

  • Carrying cost rate is the yearly percentage you can apply to any stock decision. Holding $10,000 more inventory for six months at a 30% rate costs about $1,500.
  • Per-unit carrying cost shows the true cost of slow movers. Multiply by the months a product typically sits and compare it with its margin.
  • Use the rate when choosing order sizes: a bulk discount is only worth taking if it saves more than the extra carrying cost of the larger order.

Avoid counting costs twice

  • If your 3PL storage fee already includes insurance or handling, enter those as zero. See the 3PL cost calculator.
  • Use either your borrowing rate or your opportunity cost for the same money, not both.
  • If your shrinkage allowance already covers write-downs for obsolete stock, do not add them again under other costs.
  • Value inventory at cost, ideally landed cost, not at retail price. Retail value inflates the capital and shrinkage components.

Limitations

The calculation assumes costs are spread evenly across the year and across units. In reality, bulky items use more space and fragile or seasonal items carry more risk, so per-unit cost differs between products. For a product-level view, run the calculator per product group with its own storage share and risk allowance.

Methodology

Percentage components are applied to average inventory value and rounded to the cent; fixed annual amounts are used as entered. The annual total is the exact sum of the rounded components, and the monthly figure is the annual total divided by 12, rounded to the cent. Each component’s share of the total is shown so you can see what drives your cost.

Frequently asked questions

What is inventory carrying cost?

It is the total yearly cost of holding stock: the cost of the money tied up in it, the space it occupies, insurance, handling, and the losses from shrinkage, damage and obsolescence. It is usually expressed as an amount per year and as a percentage of average inventory value.

What is a typical carrying cost percentage?

Textbooks often quote a rule of thumb in the range of 20% to 30% a year, but the real figure varies widely with interest rates, storage arrangements and how quickly products lose value. Calculating your own number is far more useful than relying on a benchmark.

How do I work out average inventory value?

A simple approach is (opening inventory + closing inventory) ÷ 2 for the year, valued at cost. If stock levels swing seasonally, average the month-end values instead for a more accurate figure.

What cost of capital should I use?

If the stock is financed with borrowing, use the interest rate on that borrowing. If it is paid for with your own cash, use the return you could reasonably earn on that cash elsewhere. Use one or the other for the same money, not both.

How can I reduce carrying costs?

Order smaller quantities more often where supplier terms allow, clear slow-moving stock before it becomes obsolete, negotiate storage priced by actual usage, and improve forecasting. Compare the saving against the higher freight and ordering costs of smaller orders.