Back in 2013 we focused on Pad and how to use it. Because we care about our reader's margins we need to make sure you sell your products with the correct cost. Today's focus will be  carrying costs. We visit this today to make sure your costs are covered while updating our previous News Letters


Carrying Costs Need to be Recognized

Pad is the concept of adding a percentage or dollar amount to an item's cost to more truly reflect the cost of an item.  Let’s look at one of the components that speaks loudly on why we should use pad in our inventory costing systems.

  • Help cover the carrying costs of your inventory , these numbers can be substantial.

Why is it important for you to have an accurate view of your carrying costs at all times?

  1. It is critical in figuring out how much profit you can make on current inventory.
  2.  It can help you determine if production should be increased or decreased, in order to maintain the current or desired balance between income and expenses.
  3. Carrying costs are typically 20 - 30 percent of your inventory value. This is a significant percentage, making it an essential cost factor to account for. 

Let’s discuss this important cost factor and how it should effect "pad" then we can calculate the “pad".

If you run carrying costs of about 20 to 30 percent like most distributors it can account for a lot. Processors of course have more exposure because they have the carrying cost of raw materials they carry to make product. Let's go with 20% carrying cost and pad that into our cost.

Below is a good example of how a system does this.

We have added a 20%  pad on this item which when added to true cost gives us a Padded (salesperson) Cost of $3.624. Although this might seem extreme but if you base your selling price on Padded cost then you will not be paying commission on that extra cost previously not factored into the cost without pad. You can then run your profitability based on the loaded i.e. salesperson cost to see what your really making before the P&L.


By the way this cost is for Sales Analysis purposes only your system should allow Accounting cost (P&L) to a different cost,like average or true so that your gross profit is correct on your P&L. Don’t want to double dip. As we have discussed in previous issues if you don't know your inventory costs you are running blind.

Issue 640 - Everything Cycles.

Transformation and disruption was a topic in an article in the Sunday Philadelphia Inquirer. I read about the demise of Sears & Roebuck titled The Big Stumble. They believed they had no competitors. The New York Times dubbed them "The Amazon of the gilded age." Those of us in the baby boom generation remember Sears.  As a young boy I remember thumbing through the catalog, dreaming of what I could buy if I had the money.

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