Inventory and It’s True Costs

If your business sells any type of product, you know how important inventory is. Approximately 15 percent of total assets of many companies, or more for inventory heavy companies, resides in the inventory. Having enough inventory is essential to meeting customer needs, but it’s a careful balancing act, especially for small businesses, to keep just the right amount stocked for the low demand and high demand periods. Make sure to pay attention to these key costs associated with maintaining inventory, because if you don’t, you’ll soon be looking at major budgeting issues.

Initial Cost of Inventory

The most obvious cost of inventory is the initial price you pay to purchase it. Unfortunately, this is usually the smallest cost and businesses typically end up paying much more for their inventory due to associated costs of storage, transportation, etc.

Transportation/Handling Costs

Transporting and handling inventory add up quickly when you factor in workers’ wages and benefits, packaging expenses, labeling, shipping, and transport.

Service Costs

Insuring inventory may not be something you’ve thought of as a small business owner, but it’s worth considering as a fallback in case of an emergency. It has its cost, of course, depending on what type of coverage you get, but it might be worth the peace of mind knowing you can recover some or all the monetary value of the inventory if it is damaged, destroyed, or stolen.

Warehouse/Storage

Warehouse overhead to store inventory takes a sizable chunk of most companies’ budgets. It may be well and good when your product is moving, but the longer inventory is stored, the higher the price for storing it. This is because for each month of storage, paying for an item to sit is going to cut into the profit margin.

Taxes

Taxes are an unavoidable cost of doing business, though you can reduce the burden of paying them by lessening the amount of inventory your company is holding. You have to be careful when stocking less inventory, however, to ensure you have enough to satisfy demand from customers.

Opportunity Cost

There will always be an opportunity cost associated with anything you do. Business owners must measure carefully the opportunity cost of many aspects of their company to decide where funds are best allocated.

Inventory is essential to keeping your small business running and growing. Don’t be too overenthusiastic about stocking up, however, until you’ve taken a hard look at all the costs associated with keeping that inventory available.

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