The Cost of Not Turning Inventory

I recently received the following question; below is my response.

Dale, is there a way to figure out what it costs per day to hold a unit?  I have been told there is not.  Karonel

Karonel,

I think there is actually a way to do it and I believe there are essentially two components.  The first being the investment opportunity cost for the dollars. For example, if you put $10,000 (i.e. the cost of a vehicle) into a 10 year government treasury, you could earn about 3%.  That amount is about $300 a year, divide that by 365 and it’s roughly a dollar a day.  Multiply the dollar times 30 (days in the month) and you come up to about $30. On top of that, you would need to add the depreciation on a per-month basis.  Let’s assume that a $10,000 car depreciates $300 per month. Add together the $300 depreciation and the $30 investment cost ($330) and divide that by 30 days in the month, at the end you have roughly $11 per day.  It doesn’t seem like a lot per-day, until you multiply it by 30 days in the month, times the number of units you have in inventory then it starts to look like some real money.

The real question, however, is how much gross profit you’re missing on the sale of that vehicle every day that you don’t sell it, and the opportunity to reinvest those dollars into another gross profit generating unit.  When you do that analysis, you could easily come up with a very big cost of keeping a vehicle another day.

Hope this helps.