It’s time to address a subject that a lot of companies fail to notice or incorporate into their business planning – the costs of carrying inventory. Inventory costs money to purchase, this much is a given; however the cost of the inventory goes far beyond that. Typically, (if accurate values are not calculated on a case-by-case basis) the total carrying costs of a product are 25% of its value and composed of capital costs (15%), storage costs (2%), servicing and handling costs (2%) and the cost of risk (6%). Let us look at these different components of inventory carrying costs more closely.
Capital Costs
The capital cost is basically the monetary figure the capital could return if it was put into another investment that had a similar associated risk to it. By ascertaining this figure, the minimum required return on investment of the capital can be deduced. There is an equation to work a weighted-average cost of capital that makes life a bit easier. To use this equation, the cost of debt and cost of equity need to be known. The Weighted-Average Cost of Capital (WACC) equation is as follows:
(Debt Weighting x Cost of Debt) x Marginal Tax Rate + (Equity Weighting x Cost of Equity)
Essentially, owning inventory means there is capital or cash flow tied up in the value of the inventory. As long as the inventory is being housed in the warehouse and not turned into sales, this is lost cash flow that means the company lacks this money to invest elsewhere and reap a return on investment. This lost opportunity has to be costed and is what is represented by capital costs. Typically, capital costs make up the majority of carrying costs (approximately 15% of the inventory value).
Storage Costs
As long as inventory is being stored, there are costs associated. These storage costs are composed of things such as rent or lease expenses, electricity, insurance of the goods, any payable taxes and depreciation of the goods over time. Storage costs are time sensitive whereby the less time inventory is stored, the less it costs the company and the chances of selling inventory are increased, thereby increasing cash-flow and reducing the amount of money tied up in capital.
Service and Handling Costs
Inventory requires insurance and often the greater the amount of inventory, the greater the premium for insurance. This can certainly drive the cost of the inventory up. The inventory stored also needs to be ‘handled’. That is, the inventory needs to be organized, managed, moved and packed – all of which require someone to do it and someone that needs to be compensated for their time. This is an added cost, and should the inventory spend a long time in the warehouse, this cost may increase as constant organizing and relocating when more stock arrives becomes necessary.
Cost of Risks
Inventory being stored in a warehouse is inevitably at risk and this is a cost that is built into the carrying costs of a product. The risks the inventory is subjected to include things such as becoming obsolete (particularly in the electronic and tech industries), expiring before it is able to be sold (such as food and consumables), damage from water or fire and being stolen. These risks are all very real and can easily occur – therefore it is essential to incorporate the cost of them occurring into the carrying costs of the inventory.
It is all too common that the carrying costs are not properly taken into account resulting in an underrepresentation, ultimately causing the company to crumble when it can no longer simply absorb these costs. Therefore, it is essential to build some of these costs into the sale price of the inventory to ensure as far as possible, the company is not exposed to undue risk and the bottom line is preserved.
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Some experts say the potential for CBDCs to cut out commercial banks as intermediaries carries risks, because these banks perform a critical economic role by creating and allocating credit (i.e., making loans). If people chose to bank directly with the Fed, that would require the central bank to either facilitate consumer borrowing, which it might not be equipped to do, or find new ways of injecting credit. For these reasons, some experts say private, regulated digital currencies are preferable to CBDCs. In other words, the value proposition for bitcoin is that it will displace fiat money – the dollar, euro, renminbi and all the others – either fully or partially. As I argue below, I think it is inevitable that it will be ‘either, or’ – either full displacement or no displacement, complete success or failure. And as I said here on Vox three years ago (Danielsson 2018), I don’t think cryptocurrencies make sense.
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This is day trading, but a style of day trading that allows for holding positions over more than one day. Simple as that. The reality is traders do this and there is no rule that it can’t be successful. In crypto, the market never closes, so there is no end to a trading day (the best we get is daily candle closes). With software, you can automate positions and in this respect, there is not specifically a reason to close a short-term position just because the clock strikes 4 pm or whatever. Let’s say Ethereum is trading at $2,500 a token. And you think that’s near its bottom. So you buy a token for that price based on the expectation that it should soon spike by 5%. If it does, great. You cash out at and pocket $125 – minus those pesky fees of course. Do that every day, and you’ll have an impressive side gig as a crypto day trader. But we know that’s just not possible every day. At least not with the same token.
Bitcoin owners get a private key associated with their coin which can be used to establish their ownership. This private key can either be stored in digital wallets available for storing such information or can be noted down and stored physically in a locker or wallet. Bitcoin (BTC) experienced a “flash-pump” to $138,000 on Binance.US during early trading hours of June 21, according to data from the crypto exchange. Bitcoin is the universal payment system originally launched as an open-source software in 2009 by the person or group of people known as Satoshi Nakamoto. Unlike the classic banking models, Bitcoin has qualities such as anonymity or decentralization thanks to the blockchain technology that is used to validate the transactions. Due to these characteristics, user interest in this digital currency has been increasing, which has generated an enormous volume of cryptocurrencies being issued to the market following the Bitcoin pattern.
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Sharing that private key is basically like giving someone the keys to your safe deposit box or your house. For that reason, you should never share your private keys. With a physical wallet, individuals can hold fiat currency or bank and credit cards, which enable access to funds. A crypto wallet doesn’t hold cryptocurrency, but rather holds the privileged credentials needed in the form of private keys to access the blockchain for a given cryptocurrency. A private key is a secure code that enables the holder to make cryptocurrency transactions and prove ownership of their holdings. Bitcoin keys specifically feature a 256-bit string displayed as a combination of letters and numbers. It’s stored within your crypto wallet, enabling you to access your Bitcoin whenever you need to.