The Mathematics of Dead Stock: How to Calculate True Carrying Costs and Protect Working Capital

Every unsellable item sitting on a stockroom shelf is frozen cash, and frozen cash slowly melts.

Most retail managers evaluate stock with a simple purchase-versus-sale sum: "I bought this carton for 250,000 FCFA and I'll sell it for 325,000 FCFA, so I've made 75,000 FCFA."

That calculation is dangerously incomplete. It ignores the silent drag known as inventory carrying cost.

Holding stock costs money every day it sits unsold. Space, security, spoilage, damage, and the opportunity cost of the capital tied up in it will turn a paper profit into an operating loss — often without the owner noticing until the cash runs out.

What carrying cost is actually made of

Carrying cost is not one number; it is four costs stacked together. Supply-chain analysts typically estimate them as a percentage of an item's purchase value per year:

• Capital cost (12–18%) — the working capital locked in stock, plus any interest you pay on money borrowed to buy it.
• Storage cost (5–10%) — rent, floor space, shelving, warehouse electricity and security.
• Risk cost (4–8%) — theft, expiry, physical damage, and obsolescence when a newer model or fashion arrives.
• Service cost (2–4%) — insurance, handling labour, and the staff hours spent counting and moving it.

Added up, holding an item for a year costs roughly 23% to 40% of what you paid for it. On a 250,000 FCFA carton, that is between 57,500 and 100,000 FCFA a year — most of the 75,000 FCFA "profit" from the opening example, gone.

The exact percentages vary by product and city. The principle does not: stock that does not move is a cost centre, not an asset.

Step 1: Calculate your stock turnover ratio

To know whether stock is healthy or dead, you must measure its velocity. The primary metric supply-chain directors use is the inventory turnover ratio (ITR).

Both figures are at cost, not at selling price. Average inventory is simply opening stock plus closing stock, divided by two — or, better, the average of your monthly stock counts.

Reading the number

• Above 6 turns a year in fast-moving goods: healthy velocity; watch for stockouts.
• 2 to 6 turns: typical for general retail and distribution; look for categories dragging the average down.
• Below 2 turns in consumer goods or retail distribution: your capital is stagnant. You are operating a warehouse, not a shop.

Calculate the ratio per category, not just for the whole business. A single shop can have a 9-turn category subsidising a 1-turn category, and the blended number will hide both.

Step 2: Implement the ABC inventory classification

Never treat all stock equally. A disciplined merchant applies the Pareto principle — the 80/20 rule — to split goods into three operational tiers.

Class A — high value, high velocity (the profit engine)

• Typically 15–20% of your items, generating 70–80% of revenue value.
• Protocol: daily visual counts, tight re-order points, zero tolerance for stockouts. A Class A stockout is lost revenue *and* a customer sent to a competitor.

Class B — moderate value, moderate velocity

• Roughly 30% of items, around 15% of revenue value.
• Protocol: fortnightly reconciliation, standard safety buffers, review classification quarterly.

Class C — low value, slow moving (the dead-stock hazard)

• Around half of your items, but only about 5% of revenue value.
• Protocol: minimal replenishment, order on demand where possible, and a rapid liquidation rule if an item has not moved in 60 days.

How to classify in one afternoon

1 List every product with its sales value over the last 12 months (quantity sold × cost).

2 Sort from highest to lowest.

3 Work down the list: the items that together reach 75% of total value are Class A; the next block to 90–95% is Class B; everything else is Class C.

Most owners are surprised by how few items carry the business — and how many items they have been buying out of habit.

Step 3: Establish the re-order point formula

Stockouts push customers to competitors. Over-ordering drains cash. Remove the guesswork by setting a mathematical re-order point (ROP) for every Class A item.

• Average daily usage — units sold per day over the last 30–90 days.
• Lead time — the days between placing a purchase order and the goods being on your shelf, including transport and customs where relevant.
• Safety stock — a cushion for late deliveries and demand spikes. Start with 20–30% of expected usage during the lead time and adjust from experience.

The order quantity

The re-order point tells you *when*. A simple rule for *how much* is to order enough to cover the next replenishment cycle plus the safety buffer, and no more. Buying a bigger lot for a small discount is only worth it if the discount exceeds the carrying cost of holding the extra units — which, at 2% or more a month, it usually does not.

Step 4: The 60-day dead-stock liquidation protocol

When an item sits for more than 60 days past its normal turnover cycle, it stops being an asset. It is now a liability occupying space and burning carrying cost.

Apply a disciplined three-phase clearance:

1 Bundle with a Class A winner. Pair the stagnant item with a top seller at a package price. The winner carries the loser out of the door.

2 Break-even liquidation. Drop the price to landed cost — purchase price plus direct freight. Freeing that cash to buy fast-moving Class A stock is worth more than holding out for a margin that carrying cost is already eating.

3 Write-down disposal. If it has not sold at cost within a further 30 days, liquidate to a secondary market, a bulk trader or a clearance channel, or scrap it to reclaim the floor space.

The emotional obstacle is real: selling at cost feels like admitting a mistake. The mathematics is unforgiving: every month of delay costs another 2% of the item's value, and the shelf it occupies could be earning.

The stock health audit formula

For a quick monthly check on how much your slow stock is costing you:

Two percent a month is a conservative midpoint of the 23–40% annual range. If you rent expensive floor space or borrow to buy stock, your true rate is higher.

Common mistakes

• Measuring turnover at selling price. Use cost for both COGS and inventory, or the ratio is meaningless.
• One turnover figure for the whole shop. Categories hide each other. Measure per category.
• Buying for the discount. A 5% bulk discount on stock that takes six months to sell is a 7% loss.
• Reclassifying never. Class A items become Class C when fashions, seasons or competitors change. Re-run the ABC sort every quarter.
• Waiting for "the right buyer". Dead stock rarely finds one. Liquidate on the schedule.
• Counting stock as profit. Stock is a cost you have already paid. It becomes revenue only when it leaves.

Your first 30 days

Week 1 — Count. Take a full physical count at cost. If you have never done one, this week will be uncomfortable and the numbers will be worse than you expect. That is the point.

Week 2 — Measure and sort. Compute turnover and DSI per category from last year's purchases. Run the ABC sort and physically label the Class A shelves.

Week 3 — Set the triggers. Write a re-order point for every Class A item on a single sheet, and put the sheet where orders are placed.

Week 4 — Clear. List every item unmoved for 60 days and start the three-phase protocol. Book the cash recovered as working capital, not as profit.

How stock and cash are connected

Stock is one of three places your working capital hides. The others are the money customers owe you and the credit your suppliers give you. Together they define how long your cash is trapped:

This is why dead stock and cash crises arrive together. Reducing stock days is usually the fastest, cheapest working-capital improvement available to a merchant — faster than a loan and cheaper than a discount sale.

Why one turnover figure hides the problem

A single blended ratio for the whole shop can look healthy while one category quietly drains the business. A worked example makes the point.

The blended figure is a fiction. Drinks are carrying the business; cosmetics are sitting for nine months at a carrying cost of roughly 2% a month — about 1,080,000 FCFA a year of working capital burned on a category that generates the least sales.

The action is obvious once the numbers are split: cut the cosmetics range to the handful of items that actually move, redirect the freed 3,000,000 FCFA or so into drinks and household goods, and re-measure in a quarter. Nothing about the shop's sales has to change for its cash position to improve.

Run the ratio by category, then by item within your worst category. The dead stock is always hiding at the bottom of the list.

If you manage the business from a distance

Owners who run a shop from abroad through a local manager usually see sales figures and rarely see stock figures. Stock is where a remote business quietly loses money.

Set a weekly stock report in a fixed format:

• Class A items: current count against re-order point, and any item below it
• Purchase orders placed this week, with supplier invoice photos
• Items unmoved for 60 days and the liquidation stage each is in
• Total stock value at cost
• One photo of the Class A shelf

Cross-check the purchases against the bank and mobile-money statements you can see yourself. When purchases outrun sales for two consecutive weeks, ask why before the third.

Signs you are carrying dead stock

• The same cartons have been in the same corner since last year.
• You only discount at year end, and only when forced.
• You buy on supplier credit in order to buy more stock.
• The shelves are full and the cash box is empty.
• Sales staff cannot name the ten best-selling items without checking.

Any two of these mean the ABC sort will pay for itself in the first month.

Key terms in English and French

• Inventory / stock — *stocks*
• Cost of goods sold — *coût des marchandises vendues*
• Carrying cost — *coût de possession des stocks*
• Inventory turnover ratio — *taux de rotation des stocks*
• Days sales of inventory — *durée moyenne de stockage*
• Re-order point — *point de commande*
• Safety stock — *stock de sécurité*
• Write-down — *dépréciation des stocks*
• Working capital — *fonds de roulement*

Frequently asked questions

I sell perishables. Does the 60-day rule apply?

Your clock is shorter. Replace 60 days with a fraction of the product's shelf life — for many fresh goods, the liquidation decision comes at a few days, not weeks. The logic is identical: discount early, dispose before the value reaches zero.

How do I find average inventory if I don't count stock monthly?

Start now. Take a full count today and another at the end of next month; average the two. Every additional month makes the figure more reliable.

Should safety stock be the same for every Class A item?

No. Scale it to two things: how reliable the supplier is, and how much demand swings. A locally sourced item with a dependable supplier needs a small buffer; an imported item exposed to port and customs delays needs a larger one. Review each buffer after every stockout or overstock and adjust by experience.

Is a very high turnover always good?

Not if it comes with frequent stockouts. A turnover of 15 with empty shelves every week means you are under-ordering Class A items. The re-order point fixes that.

What about stock I hold because a supplier demands minimum orders?

Treat the excess as Class C from the day it arrives and plan its exit — a bundle, a resale to a smaller trader — before the carrying cost accumulates.

Implementation checklist

1 Calculate turnover and DSI per category using last year's COGS and current stock at cost.

2 Run the ABC sort and label the shelves.

3 Set a written re-order point for every Class A item.

4 List every item unmoved for 60 days and start the three-phase protocol today.

5 Repeat the ABC sort quarterly; review re-order points monthly.

Takeaway: Inventory is not an investment. It is cash you have converted into a wasting asset and must convert back before the carrying cost consumes the margin. Merchants who measure velocity, classify ruthlessly and liquidate on schedule keep their working capital working.