8 Inventory Costs You May Not Be Thinking About

Inventory is often misunderstood by small business owners, especially when it comes to the costs of purchasing and maintaining it. Many business owners only think of inventory costs in terms of purchasing and shipping.

Say you run a coffee shop. You pay 2.000 € for a shipment of coffee and 100 € for shipping. That means it costs you 2.100 € to have it in inventory, right? Not quite.

There are quite a few hidden inventory management costs that you should consider in order to truly understand the price of maintaining your business's inventory. If you run a small retail, cosmetics, pharmaceutical, or hospitality business, there's a good chance you have a significant amount of inventory on hand.

Let's take a look at 8 of the most common inventory management costs that you may not be taking into account.

Carrying Costs

Carrying costs are all of the costs that are related to holding your inventory. These are the costs that are associated with purchasing an inventory and having it readily available to be able to sell products.

1) Opportunity Costs

Understand the common hidden costs of inventory to create more accurate report, minimize waste, understand the true costs of your stock, and increase your profitability.

If you have a large amount of capital tied up in your inventory, you must figure opportunity costs into your inventory management strategy.

Opportunity cost is the income that you may have received if you invested in something else besides inventory.

For example, if you run a retail business and have 100.000 € in inventory that's not selling, that money could be put to better use - such as redoing your online ordering system or upgrading your POS systems.

Investments could be much better option than simply sitting on old inventory, so it's best to consider opportunity cost closely when examining your inventory.

2) Insurance of Inventory

If you don't insure your inventory, your entire business could be threatened in the case of a serious accident. Insuring a valuable inventory can add quite a bit of carrying cost, and this should be taken into account when calculating your overall inventory management expenses.

3) Storage Space

If you have a large inventory, you may need to rent out extra storage space for your business, which can be relatively expensive. You should also take the costs of moving your inventory into account, especially if you have multiple storage units or warehouses spaces.

4) Damage, Deteriorated, or Expired Inventory

A shipment of prescription medication sent to your pharmaceutical company may be worth tens of thousands of dollars. But if these pills are held until they expire, they're worth nothing – and must be thrown out.

When dealing with perishable or delicate goods - such as cosmetics or pharmaceuticals - it's critical to manage your inventory so that you minimize waste due to deterioration and expiration. These losses should always be taken into account so make sure to regularly analyze stock quantities for products with expiry date like food and drugs.

Acquisition Costs

The other overlooked area of inventory management costs is the acquisition of new stock. It may seem that purchase price and shipping are the only costs involved here, but that's not the case. Let's take a look at acquisition costs now.

5) Purchase Price and Shipping

This is the most basic acquisition cost, and it's fairly self-explanatory. When purchasing new inventory, the cost of purchase and shipping must be logged, as well as relevant local taxes.

6) Costs of Purchasing Department

Here's where things get interesting. If you have a dedicated purchasing department, your workers are part of your acquisition costs.

Even if you don't have a purchasing department and you purchase goods yourself, your time is valuable. The value of the time you spend ordering new inventory should be factored into your acquisition cost calculations.

7) Sourcing/Supplier Development

Supplier sourcing and development is a time-consuming process. Whether you have an employee to source new items for you or you do it yourself, the cost of doing so needs to be factored into your acquisition expenses.

Some larger suppliers may also require you to pay a large down payment in order to start buying from them, and this must also be considered in your calculations.

8) Inspection/Return of Received Goods

The inspection of received goods should be taken into account, as should any potential costs incurred due to the return of said products.

When calculating costs for the inspection and return of goods, you should factor in the total time spent examining received goods - whether they're examined by you or by an employee.

You should also determine any potential opportunity costs or missed revenue that you incur due to receiving faulty goods.

Learn About Inventory Costs & Create Powerful, Accurate Processes And Business Models

The complexity of inventory management tends to grow as your business grows. If you run a business with just one or two employees, you may be able to model your inventory management costs with a simplified "purchase price plus shipping" model.

However, if you have multiple employees, a large inventory, and a dedicated warehousing area, the true cost of your inventory will be much higher.

Understand the most common hidden costs of inventory management mentioned, and use this information to create a more detailed, comprehensive business model.

With a more accurate inventory report, you can minimize waste, understand the true costs of your stock, and increase your profitability.