Debitoor's accounting dictionary
Carrying cost

Carrying cost - What is carrying cost?

Carrying cost refers to how much it costs a company to store, insure, and manage their inventory

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Companies that sell products, especially perishable products, will experience what is known as ‘carrying cost’. The storage and insurance needed to maintain these products while they’re being held by the company for sale are the bulk of the carrying cost.

What is included in carrying cost

While carrying cost covers not only the general cost of storing products, including the rental amount of the facility for physical storage, it also covers less tangible expenses such as opportunity costs (literally, the cost of choosing one option over an alternative).

Insurance is included in carrying cost and is an important part of managing inventory. However, carrying cost covers a variety of other expenses that can be overlooked such as:

  • The cost of theft or damage
  • The depreciation of products in storage
  • The cost of the employees working at the storage facility
  • The cost of those handling/processing the products

For online businesses, their carrying costs are typically greatly reduced, as they operate out of a single central storage facility, or if they’re acting as a go between for businesses operating out of their own storage and carrying costs.

Why carrying cost is important

Carrying cost not only factors into a business’s budget, but also allows that business to determine how much profit can be made with their current stock. It can also provide insight into which products should be produced more or less and therefore allow the business to operate more efficiently and generate profit.

Carrying cost gives a business an indication of how long it makes sense to hold on to inventory before they will begin losing money from that inventory instead of profiting. Typically, carrying cost will involve about 20-30% of the value of a business’s stock.

How to decrease carrying cost

If a business recognises that they are incurring hefty carrying costs, there are a number of different actions that can be taken to help reduce these amounts to contribute to enhanced revenue.

The primary action is the most obvious: to reduce and limit the amount of inventory being held by a business. Additionally, the business can take steps to reduce the amount of time that the products spend in storage. This can be especially useful for perishable items, for example. The facility in which the products are being stored is another way to reduce carrying cost as a more efficient storage space can mean lower fees.

In addition, maintaining a solid understanding of your stock is another way to determine where certain carrying costs can be decreased. This way, you have a better understanding of which products are being stored longer and potentially contributing to carrying costs.

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