Small business owners may think that accounting for inventory ends upon its purchase. The real cost of carrying inventory involves much more. Considering the fine line that half of all small businesses walk between success and failure within their first 5 years, understanding the real cost is crucial to survival.
The carrying costs of inventory (which represent as much as 25% of inventory value on hand) contain few hidden fees. They refer to aspects of business that are often overlooked by new companies, such as the total cost of purchasing items, housing, handling, and accounting for depreciation if those items don’t fly off the shelves. Often the costs are computed for a year and then expressed as a percentage of the cost of the inventory items. For example, a company might express the holding costs as 20%. If the company has $300,000 of inventory cost, its cost of carrying or holding the inventory is estimated to be $60,000 per year. Neglecting to account for any of these steps can lead to excess, wasted, lost or damaged inventory, and turn into a loss through a write-down or write-off for your business.
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