Larkridge Funding Group, a small-business funding broker in Decatur, Illinois, explains inventory carrying cost for Macon County retailers: what goes into it, how to calculate it and the inventory turnover ratio by hand, and when financing stock is worth the cost. A worked example uses hypothetical figures. Any rate or term comes from the lending partner that reviews a request.
Retail leads Macon County, Illinois by employer count
Retail trade had 326 employer establishments in Macon County, Illinois in 2023, more than any other sector, with 4,483 paid employees; 138 of those stores had fewer than five employees (U.S. Census Bureau, County Business Patterns 2023). Another 576 retail businesses had no paid employees in 2024 (U.S. Census Bureau, Nonemployer Statistics 2024). Nearby ZIP codes carry their own clusters: 33 retail employers in ZIP 62535 around Forsyth and 42 in ZIP 61727 around Clinton (U.S. Census Bureau, ZIP Code Business Patterns 2023).
For a store of a few people, the stockroom is often the largest use of cash after payroll. Knowing what it costs to hold is basic arithmetic, and few owners do it.
What inventory carrying cost includes
- Money tied up. Interest on stock bought with borrowed money, or what that cash could have earned or saved elsewhere.
- Space. The share of rent, utilities and storage used by the stockroom.
- Insurance. Coverage on the stock.
- Shrinkage and damage. Theft, breakage and spoilage.
- Markdowns and obsolescence. Goods sold below plan or not at all.
- Handling. Time spent receiving, counting and moving stock.
You will see general rules of thumb quoted for a typical carrying cost. They are not much use: your own figure depends on your rent, your goods and how fast they sell.
A worked example, with hypothetical figures
Take an imaginary Decatur, IL gift and home goods shop. These figures are illustrations only, not typical costs or offers:
| Item | Annual amount |
|---|---|
| Financing cost on stock bought with borrowed money | $4,200 |
| Share of rent and utilities used by stock | $2,700 |
| Insurance on inventory | $600 |
| Shrinkage and damage | $1,200 |
| Markdowns on slow items | $1,800 |
| Total carrying cost | $10,500 |
If the shop holds $60,000 of stock on average, its carrying cost is $10,500 divided by $60,000, or 17.5 percent of the average inventory value per year. Every $1,000 of stock that sits for a year costs about $175 to hold.
How to calculate inventory turnover
Turnover measures how often the stock sells through in a year. Divide the cost of goods sold for the year by the average inventory at cost. If the same shop's cost of goods sold was $240,000, its turnover is $240,000 divided by $60,000, or 4. Divide 365 by the turnover to get the average days an item sits: about 91 days.
Turnover and carrying cost work together. At 91 days, the shop pays roughly a quarter of its annual carrying cost on each batch of stock before it sells. Faster turnover means each batch costs less to hold.
When financing more stock makes sense
- The goods have a sales record, and turnover is steady or rising
- The gross margin on the goods comfortably covers the financing cost plus the other carrying costs for the expected holding time
- A supplier offers a volume price or terms that lower the cost of goods
- The extra stock replaces lost sales from empty shelves, rather than filling the back room
It rarely makes sense to finance slow or seasonal-looking stock you are not sure will sell, or to borrow to hold more of what already sits for months.
Which structure fits
For larger, identifiable purchases, inventory financing uses the goods as collateral. For small, regular restocking, a business line of credit lets you draw only what each order needs. A one-time gap, such as a large opening order, can suit working capital. Retail sits alongside other sectors on the industries page, and other articles are on the Larkridge blog.
By Larkridge Funding Group · Updated