What are holding costs?

Holding Costs, also known as Carrying Costs, are the expenses we incur for keeping and maintaining unsold goods (inventory) or property. Whatever you have not yet sold, costs money to “hold onto,” hence the term “holding costs.”

Imagine holding costs are like a ticking meter. The longer an item remains unsold or in storage, the more money it clocks up, that is, the more it costs you.

Wikipedia.com has the following definition of the term:

“In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, shrinkage (leakage) and insurance.”

Wikipedia, some dictionaries, and other reputable sources of information say that “holding cost” is a marketing term.

Inventory holding costs

If you sell laptop computers, perhaps you have 30 of them displayed in your store, and 400 stored at the back, in a storeroom.

Storing your stock of laptops costs money. The following are some of the expenses, that is, some of your holding costs:

  • Climate control

Air conditioning or heating to maintain optimal temperatures and levels of humidity for electronics.

  • Storeroom rent

The monthly or annual cost for the physical space where the laptops are stored.

  • Insurance Premiums

Regular payments to cover the laptops against potential risks like theft, fire, or flood damage.

  • Security Systems

Investments in alarms, cameras, and other systems to deter theft and protect the inventory.

  • Employee Salaries

Wages paid to staff who handle, organize, and account for the laptop inventory.

The loss in value of your laptops over time, especially as newer models are released.

  • Debt Interest

If you borrowed money to buy your inventory, this is the cost of the interest on that loan.

The potential gains you miss from investing the money tied up in inventory elsewhere, such as in another investment or business opportunity. You could have used that money to place more ads in the local newspaper, which would have boosted sales.

Real Estate Holding Costs

We also use the term when talking about real estate. Let’s say you want to buy a house and then sell it for a higher price – you are a speculator. The house will be unoccupied, so you will not be receiving any rent.

The following holding costs will have to be met until you have sold the property:

  • Mortgage Payments

If you took out a loan to buy the property, you will have to pay monthly installments.

  • Property Taxes and Insurance

These are ongoing expenses that must be paid regardless of whether the property is generating income.

  • Maintenance and Utilities

Even if the house is unoccupied, there will be electricity and water bills. When prospective buyers are viewing the property, it will need to be heated in the winter and perhaps cooled in the summer.

  • Homeowners Association Fees

If the house is in a gated community, monthly or annual fees may apply.

Good planning essential

Whether you are holding onto inventory or real estate, timely sales strategies and proper financial planning are essential to minimize holding costs.

These costs are a silent drain on resources, they eat into your profit margins – they add up. Be careful!