Carrying Charge

You're a home developer. You spent $5 million to build the mansion. Realtors told you it'd sell for $6.5 million. But you didn't listen. You listed it for $10 million. And it sat. And sat. And sat. After two years, your carrying charges really added up...you paid 10 percent a year on the $5 million you borrowed to build it: 500 grand a year. And you paid real estate taxes of 75k a year: 150k total. Then you had to insure, heat, light, clean, lawn-mow, and 18 other things to maintain or carry the house. All of that added up to another 200k. Finally, you sold the home for $7 million. But the carrying charges ate up all of your profits.

Next time: Zillow.

Or said another way...wouldn't it be great if we could charge for storing things like an ugly couch for a friend, or charging our kids for storing all their high school stuff when they leave home? There is such a practice in the business world, but a carrying charge refers to the cost of storing one’s own inventory.

In addition to tying up a company’s cash, carrying charges include the cost of insurance, storage, and handling. The company might also have borrowed in order to purchase the inventory, so there will be financing costs as well. For a manufacturing company, inventory would include raw materials, work-in-process, and finished products. A retail store has to maintain a lot of inventory, and a distribution company might have a big storage warehouse full of inventory waiting for customer orders to come in (think: Amazon).

Examples of carrying costs could be shipping and receiving, depreciation of the goods (writing down their value over time), leasing if the company does not own the warehouse, utilities, equipment such as forklift tractors and automated picking and pulling equipment, software for tracking inventory, security systems and guards, and wages and salaries of those who work in managing inventory. Inventory is included on the company’s balance sheet, while the costs are listed individually rather than just being labeled “carrying charges.”

Carrying charges can also refer to credit card interest when you don’t pay off the balance owed each month. And a brokerage firm will charge interest on any loans they give you in order to buy stocks and bonds, also referred to as a carrying charge.

So tell your friends and family to come and pick up their stuff, or you're going to start a carrying charge.