Dead stock cost calculation: formula and example

Dead stock costs you units on hand × landed cost × carrying rate ÷ 12 per month, plus the margin you're not earning on the capital it traps. A $2,040 position at a 20% annual carrying rate burns about $34 a month — $408 a year — before you count what that $2,040 could have done in a product that sells. The formula is three lines; the hard parts are picking a rate you can defend and disclosing the assumptions so the number survives scrutiny.

This is the calculation behind every "hold, mark down, or liquidate?" decision. The definitional context lives in dead stock on Shopify; the component-by-component breakdown of the rate itself lives in inventory carrying cost.

The formula

Monthly burn = (on-hand units × landed cost) × carrying rate ÷ 12 Annual burn = (on-hand units × landed cost) × carrying rate Total cost of ownership = capital tied up + annual burn × years held + expected price decay

Three inputs, and each has a right and a wrong version:

The retail-price error is the most common and the most damaging. A shelf of candles that retails at $14.99 and cost $6.50 each is a $6.50-per-unit problem. Value it at retail and you'll conclude the carrying cost justifies a deeper markdown than it does, then give away margin to solve an overstated problem.

Building the rate, in one table

If you use the 15–30% convention, say so out loud and treat it as an assumption with an error bar. If you want a number you can defend, build it from four components:

Add the four and you have a rate. Most small retailers land between 18% and 35% once storage is allocated honestly, with capital and risk usually the two biggest lines. A store paying high rent per square foot of stockroom and carrying a heavy aged tail can exceed 50%, at which point the rate is telling you the inventory strategy is the problem, not the formula.

The calculator table

Copy this into a spreadsheet. One row per SKU; the last two columns are formulas.

Column K is the one that changes meetings. A burn of $34/month is abstract; "this SKU spends 55% of its gross profit holding the units that don't sell" is not.

Worked example: five SKUs

All figures illustrative. A home-goods store, 20% carrying rate, everything valued at landed cost:

Read the top two rows together. BLANKET-WOOL is the worst position on every axis: $57/month, 84% of its monthly gross profit consumed by holding, and five and a half years of cover. TOTE-CANVAS-NAT is second: 343 weeks of cover, 55% of gross profit gone. Between them, $91/month — $1,092/year — to own stock that isn't selling.

TRAY-ACACIA is the instructive contrast. Its monthly burn ($12.27) is a fifth of the blanket's, but it sells 2.1 units a week, so 30 weeks of cover and 8% of gross profit. That's a slow mover needing a nudge, not an exit. MUG-CEL-16 at 1% is healthy and included to prove the calculator isn't a problem list.

COASTER-CORK-6 shows why burn-per-margin matters more than raw burn: $5.94/month looks trivial, but at 0.7 units a week it consumes 22% of what the SKU earns, and 443 weeks of cover means it's effectively furniture. Low burn on a low-margin item is not a small problem; it's a slow one.

Sensitivity: the rate changes the answer, not the ranking

Per $1,000 of inventory value, the monthly burn at each rate:

The useful property: rate assumptions move every SKU proportionally, so the ranking of your worst positions barely changes. That's why you don't need a perfect rate to make good decisions — you need a stated rate and consistent application. The SKUs at the top of the list are at the top under any defensible assumption.

The assumptions you have to disclose

If this number goes into a decision meeting, a lender conversation, or a partner discussion, disclose these or expect it to be dismissed:

1. The rate and how it was built. "20%, from the component table, capital at 11% on the credit line" is defensible. "20%" alone invites someone to replace it with their favourite number.
2. Valuation basis. Landed cost, not retail, not last supplier price.
3. Inventory basis. Units physically present on the count date, including committed stock.
4. The velocity window. Thirty days for fast movers, ninety for slow-turning categories, and always in-stock days only.
5. What's excluded. Storage already sunk in rent you'd pay anyway, labour you'd pay anyway, and costs already captured elsewhere.
6. Price decay. For trend, fashion, tech, and perishables, note that achievable price falls over time — a burn calculation at a flat rate understates the loss on those categories.
7. The opportunity assumption. If you claim the capital could earn 15% elsewhere, say what in.

One disclosure earns its own line: this is a management estimate, not an accounting figure. Nothing here changes what's in your books. The accounting treatment of dead and obsolete inventory — when it's written down, and how — is a separate exercise with jurisdiction-specific rules and should involve your bookkeeper.

What to do with the number

Three thresholds do most of the work:

• Above roughly 25% of monthly gross profit consumed: the SKU has a standing cost that rivals its contribution. Give it a decision and a date — bundle, markdown rung, or exit.
• Cover beyond about 20 weeks with velocity falling: stop reordering immediately, regardless of burn. The next purchase is what turns a slow position into a dead one.
• Categories where price decays (trend, seasonal, tech): halve the patience. Burn understates loss here because the sale price itself is falling.

Then aggregate: total monthly burn across all SKUs past 180 days, multiplied by twelve, is the annual cost of the aged tail. Compare it against the gross profit you'd expect from redeploying that capital at your normal turn — that comparison is the argument for clearing, and it's the one that survives a skeptical partner.

Common questions

How do you calculate the cost of dead stock? Multiply units on hand by landed cost to get the capital tied up, multiply by your annual carrying rate to get the annual cost of holding it, and divide by twelve for the monthly figure. A $2,040 position at 20% costs $408/year, about $34/month — before counting the return the trapped capital could have earned elsewhere.

What carrying rate should I use? Build it from components if you can: capital, storage, service, and risk, each as a percentage of average inventory value. If you can't, use 15–30% as a stated planning assumption rather than a measurement — the range is an industry convention, and stores with heavy aged stock frequently run above it.

Should dead stock be valued at cost or retail? Landed cost, always. Retail value inflates the carrying cost and makes markdowns look cheaper than they are, which pushes you into deeper discounts than the economics justify. Cost is what you actually have at risk.

Does carrying cost include the purchase price? No. The purchase price is the cost of acquiring the goods; carrying cost is what you spend because you own them — financing, space, service, and risk. That's why it's expressed as a rate on inventory value: it prices ownership, and it accrues for as long as the stock sits.

How do I calculate the cost of one old SKU? Take its on-hand quantity, its landed cost, and your rate: monthly burn = quantity × cost × rate ÷ 12. Then divide by the SKU's monthly gross profit to see what share of its own contribution the holding cost consumes — that ratio is the number that decides whether it needs a nudge or an exit.

Next step: build the calculator table for your twenty highest-value SKUs tonight — the ranking barely moves with rate assumptions, so a rough rate still gives you the right list. Anything consuming more than a quarter of its gross profit goes on the decision list with a date, and the exits are ranked in how to get rid of dead stock.