What Is The Holding Cost?
The holding cost is incurred by a business to hold onto inventory. This cost can be in the form of money (storage fees), time (the time it takes to manage and track inventory), or resources (space taken up by stock).
The holding cost is essential for businesses because it can eat into profits. Companies should try to minimize their holding costs by ordering only what they need, finding affordable storage space, and using efficient inventory management techniques. The holding costs of the corporation are composed of four elements:
- The cost of your inventory's storage space, For instance, expenses can include electricity, insurance, and property taxes.
- The cost is involved in handling the products. In addition to any additional security measures required to keep them secure, staff needs the labor hours to type them into the computer and store them.
- The harm that unused inventory could do to your company. It either deteriorates or becomes out of date.
- The capital cost of having money locked up in unsold inventory that cannot be used for anything else usually makes up the most significant amount of your carrying charges.
How To Calculate Holding Costs
By figuring out holding costs, you can assess the profit margin from your inventory and guard against potential losses from storing it for a lengthy period. First, divide the holding amount by the total worth of your stock to get your holding costs, then multiply that number by 100. Next, take the following steps to calculate the cost of holding:
1. Determine The Price Of Each Item In Your Inventory
Before starting your calculations, determine your inventory service, capital, storage space, and inventory expenses.
2. Determine The Value Of The Items In Your Inventory
Add the inventory cost components calculated in the earlier phases to determine your total inventory holding cost formula.
For illustration: Inventory holding total equals the sum of the following costs: inventory service, capital, storage, and inventory risk.
3. Calculate Your Inventory's Total Cost
It would help if you then determined the worth of all the unsold goods you have in a warehouse or storage facility.
4. Deduct The Cost Of Holding The Inventory From The Total Inventory Value
Subtract the inventory holding amount from the total value determined in the earlier phase. Next, multiply this amount by 100 to get a percentage. For illustration:
Holding cost (%) = (inventory holding sum / total value of inventory) x 100
So if your inventory value is $100,000 and your holding cost rate is 20%, your holding costs would be $20,000.
Components Of Holding Costs Formula
It's essential to comprehend the holding cost formula's various parts, especially the holding costs formulas, to understand it better. So let's examine what holding costs entail:
- Capital cost: The cost of money invested in unsold inventory, including interest, expressed as a percentage.
- Inventory service cost: Inventory service cost varies depending on the type of inventory stored and includes tax, hardware, and any necessary insurance
- Storage space costs: It includes the rent you pay for a warehouse where your unsold product will be kept, as well as any associated costs such as utility or travel costs.
- Inventory risk costs: These are the costs incurred as a result of circumstances unrelated to sales. Inventory theft, product value dilution, and administrative or administrative errors are all examples.
How To Use Holding Costs Effectively?
Once you have the numbers, you can use them in your planning: How much will your holding costs rise if you buy more inventory? Can you store more inventory without affecting your bottom line? Are the expenses high enough to justify an inventory reduction? Are you managing obsolete inventory effectively?
You may consider reducing your inventory if your holding costs are too high. But before you do that, ensure the expenses are high enough to justify the reduction. You also want to be sure that you're managing your obsolete inventory effectively. Otherwise, you could end up with even higher holding costs.
When it comes to holding costs, there's a lot to consider. But with the correct information, you can ensure that your holding costs work for you and not against you.
If you're looking for ways to reduce your inventory costs, we can help. Our team of experts has years of experience in the 3PL industry and knows how to build tools that make managing your inventory more accessible. In addition to our software solutions, we also offer storage and fulfillment services that will take the burden off your shoulders. Contact us today to learn more about our all-in-one 3PL management solution – we think you'll be impressed!
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