Controlling inventory holding costs is vital in eCommerce for sustaining profitability and a robust cash flow. This type of expense directly affects the level of working capital available because inventories that do not sell quickly bind up resources that could be vitally important elsewhere. Holding costs related to inventory holding helps organizations remain flexible and meet customer needs without having excess stock in the warehouse.

What are Inventory Holding Costs?

According to Investopedia, holding costs are the expenses related to storing inventory that hasn't been sold yet. In other words, Inventory holding or carrying costs describe the resources spent on storing unsold eCommerce inventory. 📦💸 These costs include insurance, storage charges, asset depreciation, and opportunity losses. Excess stock can quickly decrease profitability without proactive measures by tying up resources and cluttering your inventory. Managing these costs is key to running operations smoothly and reducing financial waste.

Let’s dive deeper into why knowing these costs is essential for managing your inventory effectively.

Why You Need to Know Your Inventory Holding Costs?

Inventory holding costs, also known as inventory carrying costs, are important to understand because they highlight the risks and problems associated with unsold stock. You can develop the necessary solutions and optimize your eCommerce inventory by grasping these costs. Here’s why it matters:

• Cash Flow Impact 💰: High holding costs can hurt your liquidity, making it hard to invest in growth opportunities.
• Risk of Depreciation 📉: The longer products sit in storage, the more they risk losing value over time.
• Obsolescence ⏳: This is especially true for items with expiration dates or time-sensitive.
• Better Decision-Making 🧠: Knowing these costs helps you make smarter stock-level choices, reducing the risk of overstocking.

Understanding inventory holding costs allows you to manage your inventory more effectively. Let’s explore calculating inventory holding costs using the holding cost formula.

How to Calculate Inventory Holding Cost Using the Holding Cost Formula?

Calculating inventory holding costs for your eCommerce store is simple with this formula:

If you’re wondering about the components of the carrying cost percentage, several key factors are important to consider for eCommerce businesses. Each element contributes to the overall expenses of holding inventory, impacting your bottom line. You can minimize waste and maximize profitability by carefully managing storage, insurance, depreciation, and opportunity costs. This knowledge empowers you to make informed decisions, ensuring that your inventory strategy aligns with your business goals and allows for timely reinvestment in growth opportunities.

Calculation of Inventory Holding Costs

Let’s consider an eCommerce store with an average inventory valued at $30,000 with a carrying cost percentage of 25%. Here’s how the calculation looks:

Inventory Holding Cost = 30,000 x 0.25 = 7,500

This means the annual expense to maintain that eCommerce inventory level is $7,500. This amount can impact the store's cash flow and limit the ability to reinvest in growth opportunities.

Well, what solution can you use to calculate inventory holding costs easily? Can Excel be an option?

How to Calculate Inventory Carrying Cost in Excel?

Calculating your inventory carrying costs in Excel can streamline the process and help you keep track of these important metrics efficiently. By setting up a simple spreadsheet, you can easily adjust values and see how changes in inventory or carrying cost percentages affect your overall expenses.

• Set Up Your Spreadsheet 📊: Create columns for Average Inventory Value, Carrying Cost Percentage, and Inventory Holding Cost.
• Enter Your Values 💼: Input your average inventory value (e.g., $30,000) and carrying cost percentage (e.g., 25%).
• Use the Formula ➕: In the Inventory Holding Cost column, apply the formula.
• Analyze the Results 📈: Once you have the calculation, Excel will display the inventory holding cost, allowing you to make informed decisions based on real-time data.

While this method is helpful, it’s important to note that Excel may not be the most effective solution for calculating inventory carrying costs in the long run. As your business grows and your inventory becomes more complex, relying on spreadsheets can lead to errors and make managing large volumes of data challenging. Consider using dedicated inventory management software to automate calculations, provide real-time insights, and integrate with other tools for better accuracy and efficiency. 🛠️

After exploring how to calculate inventory carrying costs, it’s crucial to implement effective strategies to minimize these costs and improve your overall inventory management.

Strategies to Minimize Inventory Holding Costs

Minimizing inventory holding costs is important to increase the profitability of your eCommerce store by maintaining a healthy cash flow. Here are several key strategies and essential features you need to minimize inventory carrying costs:

Improve Sales Forecasting Accuracy

An accurate approach to demand forecasting is one of the most successful techniques for minimizing excess inventory and accordingly inventory holding costs. Effective prediction of customer demand by enterprises permits them to keep stock levels low, decreasing storage time and inventory carrying costs. Comprehensive data analytics combined with historical sales trends allows businesses to enhance their inventory levels with demand from the market.

Accept Backorder & Preorder

Another way to reduce inventory holding costs, especially if you sell high-margin products like WRISTR, is to use backorder and preorder strategies. What does this mean? By accepting orders in advance, you can gain market insights about future demand before your product goes on sale, allowing you to optimize your inventory. If you’re stocking up on extra products to avoid stockouts during peak seasons like Black Friday and Cyber Monday, accepting backorders and preorders can be one of the effective strategies you employ. Combined with comprehensive demand forecasting, this approach helps you maintain a balanced inventory, efficiently capitalize on sales opportunities, and avoid excess stock. This way, you can minimize inventory holding costs and leverage cash flow for your eCommerce store's growth.

📌 Do you need more information to minimize overstock & inventory carrying costs with preorders? Learn how to use preorders as a valuable strategy to minimize excess stock.

Replenish Stock On Time

If you’re waiting until the last minute to restock your products and are stocking up to avoid this, having high inventory holding costs is inevitable. If your manual solution doesn’t help you keep stock at optimal levels and replenish on time, you can take control of the process with a more automated solution. This way, you can replenish stock only when needed, avoiding the need to tie up your cash in excess products that occupy unnecessary space.

Automatize Inventory Management

The primary reason for high inventory holding costs often lies in the lack of essential inventory management features and the automation they provide. An efficient inventory planning solution offers real-time inventory management, enabling you to instantly access up-to-date and accurate information. By leveraging forecasting, you can create more realistic plans and quickly turn inventory plans into purchase orders. Additionally, you can automate and accelerate this process with automated replenishment. As a result, your inventory holding costs can significantly decrease. If excess or dead stock costs you money, it's likely due to the inventory management solution you’re using. For optimal inventory management operations, consider using Fabrikatör!

Use Fabrikatör for Optimal Stock Levels & Better Profitability!

The advanced inventory management tool Fabrikatör aims to optimize stock levels and lessen businesses’ holding costs. 💸

You don’t need to spend time calculating inventory carrying costs; instead, focus on minimizing them to enhance cash flow and support your eCommerce store's growth. Fabrikatör provides all the inventory insights you need to achieve this! By automating its inventory management process, Fabrikatör optimizes the stock levels of your eCommerce store by:

📊 Offering actionable insights to make more reliable inventory decisions,

📝 Helping you create purchase orders in seconds,

🚨 Notifications for low stock levels and replenish your stock on time,

📦 Offering backorders and preorders  for you to have market insights before your products are on sale,

📈 Forecasting your store's sales and keep inventory levels balanced,

🚚 Improve your shipping strategy and reduce unnecessary costs with Freight Planning!

Would you like to discover more about Fabrikatör in only 30 minutes? See Fabrikatör in action!

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