Operator Calculators

Inventory Carrying Cost Calculator

Estimate the annual cost of holding inventory after storage, insurance, shrinkage, obsolescence, financing cost, and handling are considered.

Calculate inventory carrying cost

Average Inventory Value ($)

Annual Storage Cost ($)

Annual Insurance Cost ($)

Annual Shrinkage / Damage ($)

Annual Obsolescence / Write-Offs ($)

Financing / Opportunity Cost %

Annual Handling / Admin Cost ($)

Annual Cost of Goods Sold ($)

Annual Carrying Cost

$77,500

Carrying Cost %

31.0%

Monthly Carrying Cost

$6,458

Inventory Days

101.4

Financing Cost

$25,000

Cost per Inventory Dollar

$0.31

Carrying Cost as % of COGS

8.6%

Inventory Turns

3.6x

What is inventory carrying cost?

Inventory carrying cost is the annual cost of holding inventory before it is sold or used. It includes more than warehouse rent. Capital tied up in inventory also creates financing cost, opportunity cost, handling cost, insurance cost, shrinkage, damage, and obsolescence.

For owner-operators, inventory is not just an asset. It is also a capital allocation decision. Too little inventory can hurt sales. Too much inventory can quietly drain cash flow.

Formulas

Financing Cost = Average Inventory Value × Financing / Opportunity Cost %
Annual Carrying Cost = Storage + Insurance + Shrinkage + Obsolescence + Financing Cost + Handling
Carrying Cost % = Annual Carrying Cost ÷ Average Inventory Value
Monthly Carrying Cost = Annual Carrying Cost ÷ 12
Inventory Days = Average Inventory Value ÷ Daily COGS
Inventory Turns = Annual COGS ÷ Average Inventory Value

Example

Assume a business carries $250,000 of average inventory. If storage, insurance, shrinkage, obsolescence, handling, and financing costs total $77,500 per year, the carrying cost is approximately 31% of inventory value.

That means every dollar of inventory costs roughly $0.31 per year to hold before considering whether it is the right inventory, moving quickly enough, or supporting profitable sales.

For operators, this is why excess inventory can make a business feel cash constrained even when sales are growing.

Common mistakes

Treating inventory as harmless because it appears as an asset on the balance sheet.
Ignoring the cost of capital tied up in slow-moving stock.
Forgetting shrinkage, damage, obsolete materials, and write-offs.
Buying too much inventory to chase small unit cost savings.
Failing to connect inventory decisions to working capital and cash flow.

New to Approach?

Start with the Core Frameworks.

Approach is best experienced through its core frameworks. Begin with the five foundational frameworks that establish the philosophy behind every operating decision, note, and calculator on the site.

Start Here →