Do you face excess inventory today and how much money can you save on it?

08. 05. 2023
As Warren Buffet said this week on CNBC: “It is a different climate than it was six months ago. And a number of our managers were surprised, Some of them had too much inventory on order, and then all of a sudden it got delivered, and people weren’t in the same frame of mind as earlier.” (*)

And the inconvenient truth is that excess inventory comes at a cost too.
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To calculate the amount of capital cost relating to excess inventory, you need to consider the carrying cost of inventory and the cost of capital.

Carrying cost of inventory includes the cost of storing, handling, and insuring the inventory. It is typically expressed as a percentage of the inventory value per year. For example, if the carrying cost is 20%, then for every $100 worth of inventory, the carrying cost would be $20 per year.

The cost of capital is the cost of obtaining funds to finance the inventory. This can include interest payments on loans or the opportunity cost of using cash to purchase inventory instead of investing it elsewhere. The cost of capital is typically expressed as a percentage per year.

To calculate the capital cost savings from reducing excess inventory, you can use the following formula:

Capital cost savings
= (Carrying cost percentage + Cost of capital percentage) x Reduction in excess inventory value

For example, let's say a company has excess inventory worth $100,000 and its carrying cost is 20% per year. The cost of capital is 10% per year. If the company reduces its excess inventory by $50,000, the capital cost savings would be:

Capital cost savings = (20% + 10%) x $50,000 = $15,000

In this example, the company could save $15,000 in capital costs by reducing excess inventory by $50,000.

In conclusion, reducing excess inventory can have a significant impact on your capital costs. By reducing excess inventory, you can lower carrying cost and the cost of capital, resulting in capital cost savings. By accurately tracking inventory levels and implementing inventory management strategies, you can reduce excess inventory and realize these savings, ultimately improving your financial performance.

Do the math now and start saving today!

(*) CNBC

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