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Holding Costs Formula

What are holding costs?

Holding costs are expenses to store and hold inventory in a warehouse until it’s sold to the consumer. Also called carrying costs, holding costs are an important metric related to total inventory costs — right along with ordering costs and shortage costs. A company’s inventory holding costs typically include fees for storage space, labor, and insurance. Minimizing unsold inventory (and therefore, your holding costs) is a critical part of any warehousing or supply chain management strategy.

How to calculate holding costs

Holding costs are commonly expressed as a percentage of the total inventory value during a set period of time. Brands rely on holding costs to determine how much profit they're making from their inventory, and to check how long they can store unsold inventory before they start losing money on it. In addition, holding costs communicate the amount of inventory to be bought or sold in order to maintain inventory levels, support inventory control, and enhance profitability.

Holding costs formula

To calculate your own holding costs, use the formula: 

Holding cost (%) = [inventory holding sum ÷ total value of inventory] x 100

Here, ‘inventory holding sum’ refers to the four elements that make up your holding cost: capital costs, inventory service costs, inventory risk costs, and storage costs.

Holding cost calculation example

Imagine you own a candle company that stores its unsold inventory in a warehouse location. The total value of your candle inventory amounts to $50,000. Your inventory service costs, capital costs, storage space costs, and inventory risks amount to $10,000. Using these numbers, you can quickly calculate your holding cost, since you know your inventory holding sum equals $10,000. The applied formula looks like: [$10,000 ÷ $50,000] x 100, and therefore, your candle brand has a holding cost of 20% of its total inventory value.

Frequently Asked Questions

  • How much are holding costs on average?

    Holding costs frequently total around 20 to 30% of the total inventory value, though they vary by industry and the size of your business (and will incrementally increase the longer an item remains unsold). What’s more, this percentage can also vary based on the number of items you sell, your unique inventory turnover ratio, and your warehouse storage requirements.

  • Where do you encounter holding costs?

    Inventory holding costs are a common fee that retailers can incur whenever they’re storing inventory in a warehouse space. Although holding costs are largely an unavoidable part of doing business, the impact they have on your cashflow can be minimized by optimizing inventory turnover, as well as creating better forecasting predictions (via advanced inventory systems).

  • Are holding costs and carrying costs the same?

    In inventory management, holding costs and carrying costs are one in the same. Regardless of which term you prefer, these expenses are calculated the same way, and are pivotal in helping you figure out whether your business is operating efficiently. High inventory carrying costs might indicate your brand has more available inventory than it needs (based on demand), and that you need to adjust the reorder point with your manufacturers or distributors.

More terms and formulas

inventory ABC Inventory See definition and examples
Other Amazon Marketing Services (AMS) See definition and examples
formulas Economic order quantity (EOQ) formula See definition and examples

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