Holding Cost (Inventory Carrying Cost)
Definition
The total yearly cost of keeping inventory on hand: storage, insurance, shrinkage, obsolescence and the cost of the cash tied up in it. It often runs 20% to 30% of inventory value per year.
Want a deeper explanation?
Formula
Annual Holding Cost = Average Inventory Value × Holding Cost %Most owners see inventory as an asset and forget it costs money every month it sits. The biggest hidden piece is the cash: money in stock cannot pay down debt or fund growth elsewhere.
Knowing your rate makes over-ordering decisions easier to see. Watch for: bulk-buy discounts of 5% that are wiped out by a year of 25% holding cost.
Example
$400,000 of average inventory at a 25% holding cost rate costs about $100,000 a year just to keep on the shelf.