What does a pallet of stock actually cost you to hold for a year? In the summer of 2022, that question is no longer academic for any British Columbia business that carries inventory. Two forces are squeezing from opposite ends at once: input prices are still rising fast, and the cost of the money you borrow to finance that inventory has climbed sharply. On July 13, 2022, the Bank of Canada raised its overnight rate by a full percentage point to 2.50 per cent — and it has signalled more to come. When both the price of goods and the price of credit move up together, inventory stops being a quiet line on the balance sheet and becomes one of the most expensive decisions you make each month.
This post is for owners and finance leaders of established BC firms — distributors, manufacturers, retailers, contractors — who are managing real working capital, not theory. The goal is to reframe inventory as a financing decision and to give you a concrete way to measure what your stock is costing you.
Why inventory is suddenly so expensive to hold
Inventory has always carried a cost beyond its purchase price. What has changed in 2022 is that every component of that carrying cost has risen at once:
- Financing cost. If you fund inventory with a line of credit, your rate has moved up in lockstep with the Bank of Canada. Operating lines priced at prime plus a margin have repriced repeatedly through 2022.
- Replacement cost. With Canadian inflation having peaked at 8.1 per cent year over year in June 2022 — the highest since 1983 — the goods you sell today often cost more to replace than you paid for them.
- Obsolescence and shrinkage risk. The longer stock sits, the greater the chance it is marked down, damaged, or stranded by a demand shift.
- Storage and handling. Warehousing, insurance, and labour have all risen with general cost inflation.
A useful rule of thumb is that the all-in annual carrying cost of inventory for many SMBs sits somewhere between 20 and 30 per cent of the inventory's value. In a low-rate, low-inflation world, owners could afford to ignore this. In 2022, ignoring it quietly drains both margin and cash.
How do you actually measure your inventory carrying cost?
Start by separating the question into two parts: how much you hold, and how long you hold it.
Days inventory outstanding (DIO) tells you how many days, on average, a unit sits before it sells. Calculate it as average inventory divided by cost of goods sold, multiplied by 365. A firm with $600,000 in average inventory and $2.4 million in annual COGS turns its stock roughly four times a year — about 91 days on the shelf.
Now attach a cost to those days. The financing portion alone is straightforward: if your operating line is priced at, say, 5.7 per cent in mid-2022, every dollar tied up in stock for a full year costs you 5.7 cents just in interest. Layer on storage, insurance, obsolescence, and the opportunity cost of cash, and you arrive at your true carrying rate.
A worked example: the cost of an extra month of stock
Consider Coast Range Supply, a hypothetical Lower Mainland distributor with $2.4 million in annual COGS. Management is debating whether to keep buying ahead — building a buffer against supply delays — or to tighten ordering.
Scenario A — Build the buffer. The team holds 120 days of inventory to protect against shipping uncertainty. Average inventory: roughly $789,000 ($2.4M ÷ 365 × 120). At an all-in carrying rate of 24 per cent, the annual carrying cost is about $189,000.
Scenario B — Tighten to 90 days. By renegotiating supplier lead times and ordering more frequently, the team holds 90 days. Average inventory falls to about $592,000. At the same 24 per cent carrying rate, the annual carrying cost drops to about $142,000.
The difference is roughly $47,000 a year — and, just as importantly, nearly $200,000 of cash freed from the shelves and back into the operating line, where in 2022 it directly reduces interest expense. The trade-off, of course, is stockout risk: if tighter inventory causes lost sales or rushed air freight, the saving evaporates. The discipline is to find the level where carrying cost and stockout cost are balanced, not simply to cut.
What can you do about supplier terms?
Supplier payment terms are the cheapest financing most businesses never negotiate. In a rising-rate environment, the value of an extra 15 or 30 days of payment terms goes up, because the alternative — borrowing on your line at 2022 rates — has become more expensive.
Practical moves worth pursuing this quarter:
- Extend payables where the relationship allows. Moving from net 30 to net 45 with a key supplier shifts weeks of financing off your line and onto theirs, at no interest.
- Re-examine early-payment discounts. A 2/10 net 30 discount (2 per cent off for paying in 10 days instead of 30) is an annualized return of roughly 37 per cent. When your borrowing rate is near zero, the maths is murky. In 2022, with credit costing more, taking genuine prompt-payment discounts is often clearly worthwhile — provided you have the cash.
- Diversify and shorten lead times. A second qualified supplier, even at a slightly higher unit price, can let you hold less safety stock. Less safety stock means less financing.
- Negotiate price-protection or volume terms. With input prices volatile, locking a price for a defined window can be worth more than a small per-unit discount.
Should you finance inventory differently?
How you fund inventory matters as much as how much you hold. A few options BC owners should weigh:
- Operating line of credit. Flexible, but now the most rate-sensitive option. Best kept for genuine short-term swings, not as permanent inventory funding.
- Inventory or asset-based financing. Lenders advance against the value of stock. Useful for seasonal builds, but read the advance rates and covenants closely.
- Supplier financing. As above — frequently the lowest-cost lever.
- Term debt for the permanent portion. If a baseline level of inventory is effectively permanent, financing that core with fixed-rate term debt — locked in before further hikes — can be more prudent than carrying it indefinitely on a floating line.
The principle is to match the financing to the nature of the asset: short-term, fluctuating stock on flexible credit; permanent baseline stock on term debt; everything else funded as cheaply as the supplier will allow.
Key takeaways
- Inventory in 2022 is a financing decision, not just a purchasing one — its all-in carrying cost commonly runs 20 to 30 per cent of value per year.
- Measure your days inventory outstanding and attach a real dollar carrying rate to it; small reductions in days free meaningful cash and cut interest expense.
- Supplier payment terms are often your cheapest source of financing — extend payables and reassess early-payment discounts as your borrowing rate rises.
- Match financing to the asset: flexible credit for fluctuating stock, term debt for the permanent core, supplier terms wherever possible.
- Balance carrying cost against stockout cost; the goal is the right inventory level, not simply the lowest.
When money was free, slow inventory was a nuisance; now it is a leak in the hull — and the boat is moving faster.
If you would like a clear read on what your inventory is truly costing you and how to restructure its financing, the advisory team at RN Canada can model your carrying costs and working-capital options. Reach out to discuss fractional CFO support tailored to your BC business.