Inventory carrying cost is everything it costs to hold stock until it sells: the money tied up, storage, insurance, shrinkage, damage and markdowns. Starway Business Loans, a small-business funding broker in Valdosta, GA, offers a worksheet for Lowndes County, GA retailers to estimate their own figure and decide whether inventory financing or a line of credit pays for itself.
Retail leads in Lowndes County, GA
No sector in Lowndes County had more employer establishments in 2023 than retail, at 512, and nearly half of those stores (244) employed fewer than five people (U.S. Census Bureau, County Business Patterns 2023). In ZIP 31601 alone there were 232 retail establishments. Retail stores also paid $212.7 million in wages county-wide. For a small shop, the money sitting in stock can easily exceed the money in the bank.
Is there a typical carrying cost?
Not one that fits every store. A hardware store with slow-moving bolts and a boutique with seasonal clothing carry very different costs, and rules of thumb borrowed from large chains can mislead a small retailer. The honest answer is to work out your own figure, which takes about an hour with your books.
The parts of the cost
- Capital cost: what the money tied up in stock costs you, either the interest on borrowed money or what the cash could earn elsewhere.
- Space: the share of rent, utilities and storage that the stock occupies.
- Insurance and taxes: coverage on the stock and any tax assessed on business property.
- Shrinkage: theft, damage and miscounts.
- Obsolescence and markdowns: goods that date, spoil or have to be cleared below cost.
- Handling: the staff time spent receiving, counting and moving stock.
A worksheet to fill in
| Line | How to estimate it | Your figure for a year |
|---|---|---|
| Average inventory value | Average of your month-end stock values at cost | |
| Capital cost | Average inventory times the interest rate you pay or could earn | |
| Space | The part of rent and utilities that stock takes up | |
| Insurance and taxes | Premiums and any property tax on stock | |
| Shrinkage | Book stock minus counted stock | |
| Markdowns and write-offs | Cost of goods cleared below cost or thrown out | |
| Total carrying cost | Sum of the lines above |
Divide the total by the average inventory value to get your carrying cost as a percentage. That is your own figure, and it is the one to compare with the margin a stock purchase will earn.
A hypothetical example
Invented numbers, to show the method only: a shop carries $40,000 of stock on average. Over a year it spends $2,400 of rent and utilities on storage, $600 on insurance, loses $1,200 to shrinkage and marks down $2,800 of goods, and the money tied up costs it $2,000. The total is $9,000, or 22.5 percent of average inventory. A bulk order that earns less than that over the time it sits on the shelf costs the shop money, however good the supplier's discount looks.
Using the number
Once you have your carrying cost percentage, use it every time a supplier offers a volume discount. Compare the discount with the carrying cost for the months the extra stock will sit on the shelf. If the stock will take four months to sell, a third of a year's carrying cost applies to it, and the discount has to beat that before any financing cost is added.
When borrowing for stock makes sense
Borrowing for inventory pays when the margin on the goods comfortably exceeds the carrying cost plus the financing cost, and when the goods will sell within the term. Inventory financing uses the stock as security and suits larger, planned purchases. A line of credit suits frequent, smaller restocks you repay as goods sell.
It rarely pays to borrow for slow-moving stock or for goods that date. Clearing those first frees cash without any financing at all.
Further reading
See how retail compares with other local sectors on the sector pages, and the county's retail figures on the Lowndes County picture. Find the kitchen, contractor and dental posts on the Starway blog. Lending partners decide every request; this worksheet is planning arithmetic, not an offer.
By Starway Business Loans · Updated
