Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Carrying inventory costs money even when nothing about it changes, because the capital tied up in unsold stock could be earning a return elsewhere, and that opportunity cost sits alongside storage, insurance and the slow erosion of value from shrink and obsolescence, costs that don't show up as a single obvious line item anywhere.
Before you rely on it
What to check
Include the capital opportunity cost of money tied up in inventory, not just the visible storage and insurance costs, since it's often the largest piece of the total.
The common error
Where people go wrong with inventory carrying cost calculator
Estimating carrying cost from storage and insurance alone. The opportunity cost of capital tied up in unsold inventory is typically the largest component, and leaving it out understates the true cost of holding stock substantially.
Sensitivity evidence
How average inventory value changes the estimated annual carrying cost
| Average inventory value | Estimated annual carrying cost | Combined carrying-cost rate | Estimated monthly carrying cost |
|---|---|---|---|
| $400,000 | $92,000 | 23.0% | $7,667 |
| $450,000 | $103,500 | 23.0% | $8,625 |
| $500,000worked example | $115,000 | 23.0% | $9,583 |
| $550,000 | $126,500 | 23.0% | $10,542 |
| $600,000 | $138,000 | 23.0% | $11,500 |
Every input, tested
Which input moves the estimated annual carrying cost most
| Input | Tested from | To | Estimated annual carrying cost at each end | Swing |
|---|---|---|---|---|
| Average inventory value | $450,000 | $550,000 | $103,500 to $126,500 | $23,000 (20%) |
| Cost-of-capital share | 8.0% | 12.0% | $105,000 to $125,000 | $20,000 (17%) |
| Storage and handling share | 6.0% | 10.0% | $105,000 to $125,000 | $20,000 (17%) |
| Obsolescence and shrink share | 4.0% | 6.0% | $110,000 to $120,000 | $10,000 (8.7%) |
Two variables at once
Estimated annual carrying cost by average inventory value and cost-of-capital share
| Average inventory value \ Cost-of-capital share | 6.0% | 10.0% | 14.0% |
|---|---|---|---|
| $400,000 | $76,000 | $92,000 | $108,000 |
| $450,000 | $85,500 | $103,500 | $121,500 |
| $500,000 | $95,000 | $115,000 | $135,000 |
| $550,000 | $104,500 | $126,500 | $148,500 |
| $600,000 | $114,000 | $138,000 | $162,000 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Average inventory value | $500,000 |
| Cost-of-capital share | 10.0% |
| Storage and handling share | 8.0% |
| Obsolescence and shrink share | 5.0% |
| Estimated annual carrying cost | $115,000 |
| Combined carrying-cost rate | 23.0% |
| Estimated monthly carrying cost | $9,583 |
Where the inputs come from
Average inventory value is the mean stock on hand valued at cost, from the balance sheet. The three shares add up to the carrying-cost rate: cost of capital is what tying up money costs you, whether from interest or lost returns; storage and handling covers warehouse space, utilities, labor and insurance; and obsolescence and shrink covers spoilage, theft, damage and markdowns. Use your own figures where you can, since the typical total is 20% to 30% of inventory value.
Using the estimated annual carrying cost in a real decision
Weigh that against the cost of stockouts and lost sales when you decide how lean to run.
When the result stops applying
The rate is an estimate and varies by product: perishable or fast-changing goods carry much higher obsolescence costs than durable ones. The model treats the cost of capital as a percent of value even though your actual borrowing rate may differ. It does not include the cost of stockouts, which is the counterweight to holding less.
What to compare it with
Use the inventory turnover calculator to see how long stock sits, and the economic order quantity and reorder point pages to set order sizes. The working capital requirement page shows the cash tied up. Clear slow items with markdowns before the carrying cost consumes their margin.
People also ask
Frequently asked questions
What is included in inventory carrying cost?
Capital cost, storage, handling, insurance, taxes, and losses from damage, theft and obsolescence. Together they typically run 20% to 30% of inventory value a year.
How can I lower carrying cost?
Order smaller quantities more often, improve forecasts, clear slow sellers, negotiate supplier consignment or faster delivery, and reduce the range of items stocked.
Is it better to hold less inventory?
Up to a point. Lower inventory cuts carrying cost but raises the risk of stockouts and lost sales, so the goal is the balance that minimizes total cost.