Inventory Holding Cost Calculator

Four carrying costs, summed into one annual rate

On $120,000 in average inventory value, a carrying rate built from 6% storage/warehouse, 9% cost of capital, 4% shrink/obsolescence, and 2% insurance/handling sums to 21%, for an annual holding cost of $25,200.00 -- or $2,100.00/month.

Cost of capital (9%) is typically the largest single component of carrying cost for businesses financing inventory purchases, and it's also the most overlooked -- unlike storage or shrink, it doesn't show up as a line-item invoice, but it represents real opportunity cost of cash tied up in unsold stock.

At a 21% annual carrying rate, holding $120,000 of average inventory for a full year costs about as much as a fifth of that inventory's value -- which is the number to weigh against the cost of ordering more frequently in smaller batches to reduce average inventory on hand.

Why this rate matters for reorder decisions

Sum of stated carrying percentages. EOQ and stockouts are separate questions. This carrying rate is one half of the classic inventory trade-off: holding less inventory lowers this $25,200 cost but raises the risk of stockouts and more frequent, smaller (often less efficient) orders.

Shrink and obsolescence (4% here) varies enormously by industry -- perishable goods or fast-fashion inventory often carries a much higher shrink rate than durable industrial parts, so this component deserves a category-specific estimate rather than a generic default.

This is an annual rate applied to average inventory value, not a real-time figure -- seasonal businesses with lumpy inventory levels through the year should use their actual average, not a snapshot from a single month.

Using this rate in an ordering decision

This carrying rate is a required input for an Economic Order Quantity calculation -- pair it with the Inventory Reorder Point Calculator to translate this cost into an actual ordering schedule.

To see how efficiently that $120,000 average inventory value is turning over relative to sales, check it against the Inventory Turnover Ratio Calculator.

Frequently Asked Questions (FAQ)