Costs Of Holding Stocks

If too high a level of stocks is held, there may be various costs:

1. Storage requires space, and factory space costs money. The total can be quite substantial for bulky products.
2. Suppliers like to be paid, and so if a company is holding a high level of stocks they have to pay for them. This ties up capital which could be used for other more productive purposes.
3. There may also be costs associated with keeping the stocks well to ensure they don't deteriorate.
4. Cash flow may be damaged, because (as in no.2) money is tied up in stocks