Managing inventory transfer is one of the most important aspects of small business , just like cash flow, can lead to your business success or break it inventory transfer costs include inventory ordering and retention costs, as well as related paperwork management and this cost is examined by management as part of its assessment of the amount of inventory to be kept on hand, what are the costs of moving the inventory and its components?, The answer in the rest of the article, read on.
What are the costs of moving inventory?
The costs of moving inventory are among the most important inventory management challenges that companies deal with. These expenses arise from keeping products on shelves in a warehouse, distribution center or store. They include storage, employment, transportation, handling, insurance, taxes, item replacement, contraction and consumption. Investment potential also decreases when a company is restricted to inventory, reducing the likelihood of making investments.
types of inventory costs
The costs of ordering, retaining, carrying, shortage and corruption are some of the main categories of costs of transferring inventory. These groups widely separate the many different costs of transferring existing inventory, and below we will identify and describe some examples of different types of cost in each category:
1. Cost arrangement
The costs of transferring inventory in respect of demand costs include payroll taxes, benefits, wages for the Procurement Section, labour costs, etc. These costs are usually included in the combination of overhead costs and their allocation to the number of units produced in each period.
2. Inventory acquisition costs
Inventory acquisition costs are simply the amount of rent the company pays for the storage space where they keep stock, this can be either the direct rent the company pays for all warehouses combined or a percentage of the total office space rent used to store inventory.
3. Costs of damage
Perishable stock can rot or spoil if it is not sold in time, so controlling the costs of moving stock to prevent damage is necessary, as expiring products are a concern for many industries, and industries such as food industries, beverages, pharmaceuticals, health care and cosmetics are affected by the expiration and use of their products by dates.
4. Costs of carrying inventory
This is the least well-known aspect of the costs of moving inventory, this cost requires a certain amount of calculation to understand the extent to which it affects the statement of profits and losses, the costs of moving inventory indicate how much interest the business loses on the value of the unsold inventory found in the warehouses.
Inventory Transfer Costs Sections
Inventory transfer costs can be widely divided into different categories such as capital cost, handling and distribution cost, packaging/refilling cost, insurance cost, maintenance, cost preservation, storage cost, risk and opportunity cost.
If we estimate the percentage of inventory investments that go to the costs of moving inventory, then come (load cost) up to 40%., inventory processing cost is estimated at about 3 to 8%. Storage cost may range from 2 to 5% depending on location. For maintenance-related inventory, inventory transportation costs rise to 10% of inventory purchase cost, inventory risk cost may increase by 20% if inventory is slow.
If we see this from a percentage sales perspective, typical inventory transfer costs can be more than 2% to 4% of sales, which rises in the case of slow-moving stocks as in the case of slow-moving stocks And the cost of handling, the cost of storage, all of that goes up depending on how long it's not sold, Therefore, if we estimate that due to the nature of the slow motion, the cost of bearing the slow moving stock may rise inventory investment, which may reach 50% to 60% of inventory investment.
How do you calculate the costs of moving inventory?
If you are a wholesaler, retailer or any kind of company that owns inventory, many of the costs of moving inventory you incur are somehow related to items in your warehouse, however, we will limit ourselves to three key components of the cost in the form of transporting inventory costs:
1. Cost of capital
Capital costs are the costs a company will face when borrowing money. In many companies, the costs of transferring inventory are financed by many means including shareholder rights, bank loans and other sources of capital, and of course, this money is never free!
The cost of capital can vary greatly depending on the case, for example, if a principal manager or shareholder has to invest money in the company, they may accept a 5% return on their investments, and on the other hand, an investment company may expect to see a 25% return.
2. Inventory retention costs
The next set of inventory transfer costs that we will explore are the so-called handling and retention costs, defined as the inventory transfer costs incurred from the moment the goods are controlled by the company until the moment they are sold.
You can calculate these costs in two ways depending on whether the cost components are fixed or variable or not.
3. Variable costs
Are the direct costs associated with inventory, these usually include the costs of selecting, packaging and transporting inventory among others, and increase variable costs in relation directly to your stock level, for example, if a company increases its inventory levels, it will also increase variable delivery costs.
If you outsource your warehouse activities, it is easy to determine variable inventory costs, these costs usually indicate the cost of each pallet charged by the service provider, however, these costs will vary between different service providers.
How can you track inventory transfer costs in a successful way?
Small business owners often face the dilemma of how to maintain control over expenses SMEs are always looking for the types of costs associated with inventory that affect their net profits, Using an effective accounting system, you can understand how to control these costs, Where maintaining your inventory status in real-time can become easier using an effective inventory management system, here we advise you with the inventory management software of an Idea software enterprise.
In conclusion and having learned about the types of inventory transfer costs, you should also know how to reduce them, here you should reassess your business operations and eliminate any shortcomings if you intend to reduce inventory transfer costs.