# Inventory carrying cost: formula and store example > https://rundoo.ai/resources/guides/inventory-carrying-cost/ [Guides](/resources/guides/index.md) /Product Product # Inventory carrying cost: formula and store example Inventory carrying cost is what it costs a year to keep stock on hand, and building your own rate from capital, storage, insurance and tax, and risk tells you whether an early-buy discount or a deep order is worth it. [![Titus Capilnean](https://pub-5247264bd04e4ebeaecbbedb3bebb9f8.r2.dev/static/images/articles/titus-capilnean.jpeg)](https://www.linkedin.com/in/tituscapilnean/) [Titus Capilnean](https://www.linkedin.com/in/tituscapilnean/), Head of Marketing October 27, 2026 Last updated October 27, 2026 Inventory carrying cost (also called holding cost) is the annual cost of keeping inventory on hand, expressed as a percentage of your average inventory value at cost. In formula terms, the carrying cost rate = (capital cost + storage cost + service cost + risk cost) divided by average inventory value, and annual carrying cost = average inventory at cost multiplied by that rate. If your average inventory at cost is $400,000 and your carrying rate works out to 21%, you're spending about $84,000 a year to keep that stock sitting where it sits. That number surprises a lot of owners the first time they run it, because none of those costs show up on a single invoice. The interest rides along on your line of credit statement, the rent covers the selling floor and the back room together, and the warped 2x6s you culled last month went out at a discount without anyone labeling the loss "carrying cost." This guide walks through each component, builds a carrying rate for an illustrative store, and shows where the number earns its keep: pricing early-buy discounts, setting order quantities, and figuring out which pallets in the yard are quietly costing you more than they'll ever bring in. ## The four components of carrying cost Most breakdowns of carrying cost sort it into the same four buckets, and while the names shift a little from one textbook to the next, the buckets hold the same things. **Capital cost** is the biggest piece for nearly every independent store, and it's the one most owners feel in their gut without naming it. If you funded the stock on your line of credit, the capital cost is the interest you're paying on the borrowed money. If you paid cash, it's the return that money could have earned sitting anywhere else, plus what you give up by not having it available when a vendor offers a deal or a truck needs a transmission. Either way, inventory is cash wearing a costume, and the costume rental isn't free. **Storage and handling** covers your share of rent or mortgage, utilities, insurance on the building, the forklift, the racking, and the labor that moves stock from the truck to the shelf to the will call area. A lumber yard feels this one harder than a paint store does, because a bunk of 2x4s occupies expensive covered space, but even a tidy hardware store is dedicating square footage to slow movers that could hold faster ones. **Service costs** are insurance and property taxes on the inventory itself. Some places include inventory in business personal property tax and some do not, so check what your own county or municipality assesses before you write this line off as zero. **Risk costs** are what the stock loses by sitting: shrink, damage, obsolescence, and spoilage. Every kind of store has its own version: farm and feed stores watch date codes on feed and seed, paint dealers in cold climates know what a freeze does to a gallon of latex, and lumber warps, twists, and gets picked over until what's left is cull. Garden centers carry inventory that is quite literally dying to be sold. If you've ever marked something down to clear it, you paid risk cost that day. ## The carrying cost formula, with a store example Here's the formula again, set up the way you'd run it on a legal pad: **Carrying rate = (capital + storage and handling + insurance and taxes + risk) / average inventory value at cost** **Annual carrying cost = average inventory value at cost x carrying rate** Average inventory at cost means the average of what your on-hand inventory is worth at cost across the year, not the high point in March and not the low point in December. Pull your balance at the start of each month, average the twelve numbers, and you're close enough for decision-making. Here's an illustrative store with $400,000 of average inventory at cost: | Component | Annual cost | Where you'd find it | | --- | --- | --- | | Capital: line of credit at 8% on $400,000 | $32,000 | Loan statements | | Storage and handling share (rent, utilities, forklift, labor) | $30,000 | Estimate your inventory share of occupancy costs | | Insurance and property tax on inventory | $6,000 | Insurance policy, county tax bill | | Shrink, damage, and markdowns to clear | $16,000 | Count variances, markdown history | | **Total carrying cost** | **$84,000** | | That $84,000 on $400,000 of average inventory is a 21% carrying rate, which sits inside the published rules of thumb, where one source puts carrying cost at 15 to 30% of inventory value per year and another at 18 to 35%. The spread between those ranges is the whole point, because it means you should not borrow somebody else's number. A store with cheap owned space and tight counts carries inventory for far less than a store paying rent on a drafty warehouse with a shrink problem. Build your own figure once a year, ideally right after your accountant visit, and use it for every buying decision that follows. ## What carrying cost looks like per item Annual percentages feel abstract until you put them on a shelf tag, so here's the same 21% rate applied to items you'd recognize: * A gallon of paint that costs you $58 and sits a full year costs about $12 to carry (58 x 0.21). Sell it in month eleven instead of month two and most of your margin on a tight-priced gallon went to rent it paid to your own shelf. * A $16.50 bag of layer feed held for three months costs about $0.87 to carry (16.50 x 0.21 x 3/12). Feed turns fast enough that holding cost rarely bites, which is why the date code matters more than the shelf time. * A $12.40 box of deck screws costs about $2.60 a year to hold. That's fine for a box that sells every week, and a quiet leak for the size you stocked on a hunch two springs ago. The per-item math is where carrying cost stops being an accounting exercise and starts being a buying tool. Every dollar of stock on the shelf has a meter running, and the meter runs at the same rate whether the item is a hero or a dud. ## Where the carrying rate earns its keep Once you have your rate, four decisions get easier. **It completes the EOQ formula.** Economic order quantity balances ordering cost against holding cost, and the H in that formula is your unit cost multiplied by your carrying rate. If you've been guessing at H, your EOQ has been a guess too. There's a full walkthrough in our [economic order quantity formula guide](/resources/guides/economic-order-quantity-formula/index.md). **It prices forward buys and early-order programs.** Vendor programs love to offer a discount for taking spring goods in November, and the carrying rate tells you whether to bite. At a 21% annual rate, holding inventory four extra months costs about 7% (21% x 4/12). A 3% early-buy discount on those terms loses you money. The same discount with dating terms that push your payment out past the selling season changes the math entirely, because delayed payment slashes the capital component, which was the biggest piece. Ask about the dating before you ask about the discount. **It explains dead stock.** Dead stock is pure carrying cost: the capital, the space, and the risk with no revenue attached. A $5,000 pile of obsolete fittings at a 21% rate costs over $1,000 a year to keep, which means clearing it at cost is a win and clearing it at 80% of cost might still be one. If that pile sounds familiar, our guide to [finding and clearing dead stock](/resources/guides/dead-stock-how-to-find-and-clear-it/index.md) walks through the process. **It makes the case for turns.** Carrying cost falls when inventory turns faster, because the same sales volume needs less average stock to support it. If you cut average inventory from $400,000 to $350,000 while holding sales flat, you freed $50,000 of cash and cut the carrying bill by about $10,500 a year at the 21% rate. Turns are the metric the trade watches, and we've got a guide on [inventory turnover and GMROI for hardware stores](/resources/guides/inventory-turnover-ratio-and-gmroi-for-hardware-stores/index.md) plus a companion on [days inventory outstanding](/resources/guides/days-inventory-outstanding/index.md) if you prefer thinking in days on the shelf. Pair either one with an [open-to-buy plan](/resources/guides/open-to-buy-plan-for-supply-stores/index.md) and you stop overbuying your way into a bigger carrying bill. ## Build your number once, use it all year The practical routine: once a year, pull your average monthly inventory at cost, your interest expense, a fair share of occupancy costs, your inventory insurance and any personal property tax, and last year's shrink and markdowns. Add them, divide by average inventory, and write the percentage on an index card over the desk where you build purchase orders. When a vendor rep pitches a forward buy, when you're deciding how deep to go on a new line, when you're arguing with yourself about whether to clearance the slow aisle, that one number settles more arguments than any gut feel. Your gut is good, and your gut plus a carrying rate is better. ## How Rundoo handles it Rundoo keeps two costs per product: receiving updates Average cost, which is what the units on your shelf cost you, while Standard cost drives your margin-based price tiers and doesn't move on a receipt. Landed cost (freight added on a received purchase order, distributed by quantity or by subtotal) flows into average cost and into cost of goods sold when the items sell, so your inventory value reflects what you paid to get it on the shelf. The Inventory dataset in custom reports gives you on hand, on-hand value, annual turns, last sale date, and annual units sold, grouped by location, department, or vendor, which covers the input list for the carrying cost worksheet above and for spotting what's been sitting. Counts (full or cycle, scoped by vendor, category, product line, or tag) run blind from the Staff app by camera scan, and completing a count posts the dollar variance to an inventory-variance expense account, so the risk component of your rate comes from real numbers instead of a guess. And if you want a quick read on how much stock you're holding relative to sales, you can ask Dooey for days of inventory on hand alongside revenue and quantity sold, across one location or all of them. Share Topics [Product](/resources/guides/index.md#inventory-and-purchasing) [← All guides](/resources/guides/index.md) ## Frequently asked questions What is inventory carrying cost? Inventory carrying cost, also called holding cost, is the annual cost of keeping stock on hand, usually expressed as a percentage of average inventory value at cost. It adds up the cost of the money tied up in the stock, the space and labor to store and handle it, insurance and taxes on it, and the losses from shrink, damage, spoilage, and markdowns. How do you calculate carrying cost of inventory? Add your annual capital cost, storage and handling cost, inventory insurance and taxes, and risk costs such as shrink and clearance markdowns, then divide by your average inventory at cost to get a carrying rate. A store with $400,000 of average inventory and $84,000 of those costs has a 21% carrying rate, so each $1,000 of stock costs about $210 a year to hold. What is a typical inventory carrying cost percentage? Published rules of thumb run anywhere from about 15% to 35% of inventory value per year, which is too wide a range to borrow. A store with owned space and tight counts carries stock for far less than one paying rent with a shrink problem, so build your own rate from your interest, occupancy, insurance, tax, and shrink numbers once a year. Is holding cost the same as carrying cost? Yes, the two terms mean the same thing. In the economic order quantity formula, holding cost per unit (H) is the item's unit cost multiplied by your annual carrying rate, so a $12.40 box of screws at a 21% rate costs about $2.60 a year to hold. ## Find out what Rundoo can do for your business Learn how Rundoo can help you save time, money and hassle running your business. [Book a demo](/signup/index.md) ! ## See Rundoo in action [Product ### Tour the platform POS, inventory, payments, and AI for independent supply stores, in one system.](/product/index.md) [Customers ### Read customer stories See how real paint, hardware, farm, garden, and lumber stores run on Rundoo.](/clients/index.md) ## Keep reading [![ABC analysis for inventory: classify every SKU](https://pub-5247264bd04e4ebeaecbbedb3bebb9f8.r2.dev/static/images/articles/abc-analysis-inventory-aisle-photo.jpg) Product ### ABC analysis for inventory: classify every SKU ABC analysis ranks every SKU by annual dollar movement at cost so your counting, reordering, and vendor attention go where the money is, and here is the step-by-step method with a ten-SKU feed and hardware example.](/resources/guides/abc-analysis-inventory/index.md) [![Backorder vs special order vs out of stock](https://pub-5247264bd04e4ebeaecbbedb3bebb9f8.r2.dev/static/images/articles/backorder-vs-special-order-photo.jpg) Product ### Backorder vs special order vs out of stock Out of stock means your shelf is empty, a backorder means the vendor's shelf is empty, and a special order is an item you never stock that you order for one customer, and each one gets a different answer at the counter.](/resources/guides/backorder-vs-special-order/index.md) [![Cubic yard calculator: feet and inches to yards](https://pub-5247264bd04e4ebeaecbbedb3bebb9f8.r2.dev/static/images/articles/cubic-yard-calculator-photo.jpg) Product ### Cubic yard calculator: feet and inches to yards A cubic yard is length times width times depth in feet, divided by 27, so here is a calculator for rectangles, circles, and triangles with depth in inches, three worked examples, the three mistakes that wreck an estimate, and the conversion to cubic meters.](/resources/guides/cubic-yard-calculator/index.md)