Inventory glossary
What is Inventory carrying rate?
Inventory carrying rate is the cost of holding inventory for one year, expressed as a percentage of the inventory's value.
Knowing your carrying rate tells you what it actually costs to keep stock sitting on a shelf instead of selling through. It covers things like storage space, insurance, damage, and the money tied up that could be used elsewhere. Small store owners often skip this and just look at the sticker price of inventory, which hides the real cost of overbuying.
Use it to decide how much safety stock and extra inventory is worth holding. If your carrying rate is high, ordering less often in smaller batches usually makes more sense than buying big to get a discount. If it is low, buying ahead for a good price is less risky.
Formula
Example
A candle store has average inventory worth $20,000 over the year. Storage, insurance, and capital cost for that stock add up to $4,000 for the year. The carrying rate is 4,000 / 20,000 x 100 = 20 percent. This means it costs about 20 cents a year to hold each dollar of candle stock.
Common mistakes
- Using the cost of goods sold instead of average inventory value in the formula.
- Forgetting to include capital cost, the money locked up in stock that could earn interest or fund other stock.
- Treating the carrying rate as fixed forever instead of checking it when storage costs or supplier terms change.
Inventory carrying rate and SteadyShelf
SteadyShelf does not calculate carrying rate, but its order quantity suggestions help you avoid overbuying, which keeps your carrying costs in check.
SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.
Related terms
Carrying cost · Holding cost · Economic order quantity · Excess inventory · Inventory valuation
FAQ
What is a normal inventory carrying rate for a small store?
There is no fixed normal rate. It depends on your rent, insurance, and how much capital you have tied up in stock. The point is to calculate your own number and track whether it goes up or down over time.
Does carrying rate include the cost of unsold or dead stock?
Yes, if that stock is sitting in your average inventory value, its share of storage and capital cost is part of the carrying rate. Dead stock usually makes the rate look worse because it ties up money without generating sales.
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