Investing in inventory management software saves your business money and increases your profits.
One way this happens is through the software's ability to continually provide data for calculating your organization's inventory carrying cost. Knowing your carrying cost is imperative.
Let's first define carrying cost and how to calculate it...
The Carrying Cost of Inventory
is...
The total dollar amount that storing your inventory is costing your business.
How to Calculate Your Carrying Cost:
Step 1: Add up the total cost of housing all of your inventory. That means adding up the sum total of all your expenses related to storing that data (all costs related to maintaining the physical warehouse and other inventory buildings). This sometimes called the holding sum.
Step 2: Add up the total value of ALL of your currently stored inventory. In other words, determine the sum total of what your inventory is worth in dollars.
Step 3: Divide the cost of storing your inventory by the inventory's value.
Step 4: Convert your answer from a decimal to a percentage (the number you got from dividing the cost of storing the goods by the value of the goods). This is done by simply moving the decimal to places to the right.
Shown as an equation:
(The Total Price of Storage) ÷ (The Total Inventory Value) = The Inventory Carrying Cost
EXAMPLE #1
If your total inventory value is $1,000,000.00
, and the cost of storing the inventory is $250,000.00 , then your inventory
carrying cost is .25,
seen as an equation: ($250,000) ÷ (1,000,000) = .25
Now move the decimal two spaces to the right, and you have
⇨ ⇨ ⇨ ⇨ 25% Carrying Cost
In example #1, holding the inventory only has a net worth of 75% its original value. You can see the sum total worth of the inventory is being undercut by 25 cents for every dollar of the inventory's value by what it's costing you to store it.
EXAMPLE #2
If your total inventory value is $500,000.00 , and the cost of storing the inventory is $250,000.00 , then your inventory carrying cost is .50, or, once converted to a percentage,
seen as an equation: ($250,000) ÷ (500,000) = .50
Now move the decimal two spaces to the right, and you have
⇨ ⇨ ⇨ ⇨ 50% Carrying Cost
Suffice it to say, in example #2, holding the inventory is costing way more than it's worth.
You want to know your real-time inventory carrying cost. This figure allows your business to make informed decisions about how much inventory you should keep in the warehouse, how much to add, and how much it's worth.
With inventory and tracking software, the work is done for you and constantly updated. FlowTrac's robust software packages will update your inventory value, which is crucial for determining your inventory carrying costs.
Contact us to learn more about managing your inventory.
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