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Understand the True Cost of Inventory

One of the most important numbers an importer needs to know is the cost of inventory from shipping overseas. That's because understanding the true cost of inventory enables an importer to better manage purchasing and sales decisions, says Larry Delson, owner of Delson International, an import/export consulting firm in New York.

The cost of inventory isn't just the purchase price. The final number includes additional shipping costs, such as loading the goods in a foreign port, transportation and freight - all the way to the warehouse, duties and inspections. This is also known as the "landed cost," or the total cost of a product once it has arrived at the buyer's door, Delson says.

For example, if a U.S. proprietor is importing 300 bowls from Mexico, according to Delson, the importer and exporter must first agree on the sale's terms, such as which party handles the cost of international transportation, customs clearance and taxes. If the importer was responsible for these charges and buying the bowls at $3 a piece from Acapulco, as an example, they would have to add, "$300 for ocean freight, 10 percent tax, $100 of clearance charges and $200 for inland freight," Delson says. Mathematically, this would be represented as $3 per bowl + 10 percent tax + (($300 + $100 + $200 freight charges)/300 bowls). Thus, the landed cost is 3 + 0.30 + 2 = $5.30. This is each bowl's landed or final cost.

The cost of inventory isn’t just the purchase price.

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The Benefit of Knowing the Landed Cost

When importers know the landed cost of their inventory, they can:

·      Determine whether a product is worth importing from foreign countries

·      Price goods appropriately for final sale

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·      Track their margins

·      Determine whether a profit can be made

·      Know which products deliver the greatest profits

Before Delson agrees to any international payment, he calculates the landed cost to determine whether he can make a profit and based on that, decides whether to pay for international shipping himself or to have the vendor cover it for an extra fee. "In some instances the seller's cost for transportation will be less than [what] the importer can arrange," he says.

As importers calculate their landed costs, they can consider the services of an online foreign exchange provider that has low markups and total transparency when sending international payments that are converted into foreign currencies. Plus, importers can sign up for market-rate alerts that notify them when their preferred exchange rates become available.

Calculating the True Cost of Shipping

As a business grows, calculating inventory costs becomes more complex. For example, if an importer purchases many different products that ship in the same container, or she buys goods from several vendors with different purchase agreements, the cost of goods and freight will vary, making the final cost of goods difficult to ascertain. Delson prefers to calculate them manually instead of using a shipping calculator because, "it is not that difficult once one knows all of the variables."

The key is to have a system that allows each piece of the process to be easily tracked, so that importers can consistently track inventory costs and understand the financial impact of their choices.

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