Inventory carrying costs can make up a significant amount of your expenditure when buying and storing goods. Especially for new business owners, carrying costs can often be forgotten about with only the purchase price of goods looked at. However, to capture your business’ true return and profit all costs need to be recognized and accounted for.
So what are your typical inventory carrying costs? Without going into too much detail when looking at your carrying costs there are a few key areas you should factor in. These can be as obvious as the physical space the inventory takes up and the rent you pay for inventory storage, associated utility bills and of course the insurance taken out for the space and the stock on hand. But some of the less obvious ones you need to look at can be the likes of handling costs, depreciation, capital invested in the inventory and obsolescence.
So what’s the big deal? Here’s three key reasons to have a handle on your carrying costs.
The biggest reason inventory carrying costs actually matter is money. Pure and simple. At the end of the day every business has to make a profit, and in industries where profit margins are tight, even the smallest of costs can play a big part. What may seem like a small cost to factor in at the beginning can snowball into something that could hurt your business’ bottom line. Just think about how much extra rent you’ll have to pay or insurance you’ll need if your business takes off. Don’t brush off any costs just because it seems insignificant, it still plays a part in eating up your money.
Another major reason to have a handle on these costs is the ability to make more informed business decisions and have a more informed buying strategy. For example, you can place large bulk orders at a better price and this comes across as cost saving. However, with your inventory sitting in a warehouse, you increase your carrying costs so in reality, how much are you saving by doing this? Simply, if you are ignorant of your costs you can never really know whether you are actually making the right calls and affecting your business in a positive way.
Understanding all your costs is also important when it comes to your analysis. Especially important when businesses are looking to streamline and grow, understanding where they can make efficiencies is imperative. You must know where your money is tied up and where your expenditure lies. For example, you might be able to get a large warehouse a little cheaper if it is further afield from your retail shop, but if you have to pay considerably more in handling and transportation costs as well as more insurance costs for the larger space, is it really worth it? For most businesses that already have their structure and processes in place, getting a better grip on the costs means they can proactively see whether they can simplify or update anything.