Carrying cost refers to the total amount of money it costs a business to hold inventory in stock.
Storing, moving, and maintaining inventory can be costly — especially when that inventory isn’t shipping out to customers. A carrying cost is a cost associated with holding inventory in-store, in a distribution center, or in a warehouse. These costs include taxes, insurance, funds for replacing perishable products, and costs related to depreciation of products.
A carrying cost also includes opportunity cost, which is an estimation of the amount of money the business wins or loses by choosing one product over another.
To stay on top of their carrying costs, businesses must stay organized and continually assess the amount of money they’re spending versus the amount of money they’re generating. If this ratio doesn’t align with their operational goals, the business could lose overall profit.
Many businesses use an inventory management system to evaluate and track their carrying costs. These systems give businesses real-time insight on their fulfillment procedures and inventory-related costs.