What Excess Inventory Really Costs You to Hold

Excess inventory doesn't sit still. It costs money every day, in ways that mostly don't appear as a line item anyone reviews. That's why it accumulates — nothing in the monthly reporting makes the pain visible until someone needs the space.

The Cost That Doesn't Appear

If holding excess inventory generated a monthly invoice labeled "cost of inventory we aren't selling," it would be dealt with quickly. Instead it's distributed across rent, insurance, labor, and interest, none of which flag which portion is attributable to stock that isn't moving.

Dead inventory is expensive in exactly the way that's hardest to notice: spread across five accounts, none of which say what it's for.

What Goes Into It

Carrying cost is conventionally put at 20–30% of inventory value per year. The components:

• Storage. Rent or mortgage on the space, or the opportunity cost of racks that could hold product that turns.
• Capital. Money tied up in goods, not working. At current rates this alone is material.
• Insurance and tax. Both typically scale with inventory value, and some jurisdictions levy inventory tax directly.
• Handling. Cycle counts, moves, reorganisation, reconciliation. Labor spent on goods generating no revenue.
• Shrinkage. Damage, loss, and degradation, which rise the longer goods sit.
• Obsolescence. Usually the largest component for excess specifically. The goods lose market value continuously.

Running Your Own Number

A workable estimate, without a modeling exercise:

• Take the current market value of the excess, not book value.
• Add storage: square footage occupied times your cost per square foot.
• Add capital cost: value times your cost of capital or borrowing rate.
• Add roughly 2–4% for insurance, handling, and shrinkage.
• Add an obsolescence estimate — how much less will this be worth in twelve months? For fast-decaying categories that's a large number.

Most companies doing this for the first time are surprised, mainly by obsolescence and capital. Our breakdown of recovery rates by category helps size the obsolescence component, since it varies enormously.

The Opportunity Cost Nobody Counts

The largest cost is often the one that never appears anywhere: what that space and capital could have done instead.

A rack holding goods that haven't moved in eighteen months could hold product turning six times a year. Capital sunk in dead stock could fund inventory that sells, or marketing, or payroll. Neither shows up as a cost — they show up as revenue that never happened, which is invisible by construction.

For growing businesses this is frequently the binding constraint. We regularly speak to companies who believe they need more warehouse space when what they actually need is to clear what's already there.

Using It to Decide

Once you have the number, the decision reframes cleanly. Instead of "this offer is well below what I paid," the question becomes: is this offer better than the offer I'd get in twelve months, minus twelve months of carrying cost?

For genuinely dead stock the answer is nearly always yes, and gets more emphatic each quarter, because carrying cost accrues while market value declines. Both move against you at once.

Want the market-value half of that equation? Send us your list and we'll give you a firm number, usually within about 48 hours.