Inventory management is a time consuming balancing act, but a critical aspect of pharmacy ownership. Because effectively managing inventory takes time, it can often be delegated to a technician or other employee. For the greatest success, it should involve a certain amount of team effort; however, having an accountant managing inventory offers many advantages.

Many pharmacy owners often employ an accountant for tax returns, payroll, and a variety of other business operations, but don’t think of accountants for inventory management.

Why Is Inventory Management Important?

A pharmacy business needs to have enough inventory available to serve customers. This is obviously a key goal, but another critical goal is to earn maximum profits with the lowest amount of stock investment. Inventory management helps with this, as well as with maintaining accurate accounting records and counts of stock. Customer needs are balanced against pharmacy needs and financial restrictions.

What Will a Proper Inventory Management System Do For You?

Pharmacy inventory management is a complex process with many interrelated aspects. It is critical to have a strong system that lets you accurately:

  • conduct inventory forecasting
  • know existing inventory at a glance
  • calculate the cost of inventory storage and replenishing sold or used goods
  • manage shipping, returns, and exchanges processes
  • anticipate demand and sales

Effective pharmacy inventory management needs to let you do all of those things, while helping you to reduce the costs associated with maintaining an inventory. Many pharmacists think it is just about having necessary items on hand, but it is a more involved, key part of your overall pharmacy accounting system.  

The owner of the pharmacy is conducting an inventory management system

Pharmacy Inventory Management System Styles

Pharmacy owners tend to fall into two styles of pharmacy management, which is reflected in how they manage inventory.

Those With Manual Systems Who Do Not Integrate Systems Together

Some pharmacy owners use a manual method of pharmacy accounting, including for their inventory control. With this type of system, they do not need to constantly scan received items into a system, and the pharmacist has more control over the timing of inventory purchases. There is also less of a cash investment.

Some negative aspects of this is that more time is spent on manually ordering inventory that could be spent doing other tasks. Also, with this, there is no way to track what items are moving and which are sitting on the shelves, as non revenue-producing inventory. Reports to conveniently show existing, available inventory cannot be generated when needed. At the end of the year, a time-consuming count of the entire pharmacy’s inventory is needed to reconcile and determine what exactly is in store.

Those With Inventory Management Software Systems

Other pharmacists have inventory management software in place, and integrate their inventory into their pharmacy systems. This saves on time spent ordering, as suppliers can replace inventory automatically as you sell it. Pharmacy owners can easily track what items are selling as opposed to those that are not. Reports on inventory can easily be generated whenever needed, even reporting on profits, losses, stock levels, and more.

Software systems can help pharmacy accounting and inventory management for aspects like e-prescription management, restricted drug management, and preferred generic medications handling and creating store divisions. It also enables pharmacy owners to have access to data wherever and whenever they need. Pharmacies with multiple locations are better supported and more integrated. Faster distribution of medication is possible, with fewer mistakes, as well. Expiry management, or tracking drug expiry dates is done automatically.

The downsides of this type of system is that you need to scan items as they are received, and cash transactions in the bank account need to be tracked, for constant withdrawals of inventory purchases.

Getting Help

Because of the complexities involved in having a strong inventory system, and the advantages of having it optimized to reduce costs, having an accountant experienced in this area is a huge benefit, and reduces the risks of poorly managed inventory.

getting help from an accountant

How Can an Accountant Help?

A pharmacy accounting specialist can help by addressing key inventory concerns and helping you optimize these processes.

Does Your Management System Do Everything It Needs To?

A pharmacy accounting specialist can help you make sure your system and business processes are functioning the way they need to.

Effectively Managing Pharmacy Inventory

You need to know what you have, as well as future inventory requirements. Identifying customer demands based on trends, to predict needed stock levels is important. Being able to manage repeat prescriptions and other such activities are a key part of this. You also need to be able to actively manage medications throughout the entire supply chain. Avoiding the costs of overstocking is essential, too. Having a good, cost-effective inventory management system that gives you the information you need, and enables you to serve customers well, is essential for doing business.

Do You Have a Highly-Accurate Picture of Your Inventory-Related Finances?

An accountant can also assess if you are effectively managing pharmacy inventory based on numbers. Pharmacy accounting is a specialized area that helps to maintain accurate inventory counts, prevent slow moving inventory and inventory mismanagement, maximize cash flow, lower inventory costs, and otherwise streamline the complex process of inventory management. Maintaining optimized inventory levels and a more accurate calculation of expenses and inventory value.

Do You Know if You Have the Optimal Inventory Turnover Ratio?

Inventory turnover is an important metric for pharmacies. It indicates how quickly you are selling your inventory, and is calculated by dividing the cost of goods sold by your average inventory.

Inventory Turnover = Cost of Goods Sold / Average Inventory

Having accurate numbers is essential to calculate this, and there is an ideal rate. For an established pharmacy, inventory turnover should be around 12. This means you should completely sell out the equivalent of your entire stock of inventory 12 times each year, or roughly sell out each month. 

If your turnover is slower than this, you may be purchasing too much inventory. This means you are tying up cash unnecessarily in product that is sitting for extended times on the shelf, and limiting your valuable cash flow. Furthermore, if you do not sell the products in time, they could expire, so you lose money on product you can no longer sell.

the owner checks the profit margin in the computer

Do You Have a Good Gross Profit Margin?

Every item sold has a cost-of-goods-sold (COGS) margin, which is the amount of money you had to invest in order to sell it. Knowing this provides insights for your business choices and helps you calculate your gross profit.

Gross profit is the profit your pharmacy business makes after selling a product. This is after covering all other operating expenses, such as rent, salaries, insurance, wastage due to expired products, and more. Tightly managing inventory for better operational efficiency reduces some of the costs for goods sold, to boost gross profit.

Gross Profit = Revenue – Cost of Goods Sold

Tracking the gross profit metric is extremely critical for a pharmacy to ensure its profitability. Rebates are decreasing every single year, so pharmacies need to develop strategies to counteract this loss of income. Being able to do this starts with knowing what your gross profit margins are.

Breaking Down Metrics by Department

It is recommended to track pharmacy revenue broken down by the different departments or sources of income; this helps with strategy building. Most pharmacies can be broken down naturally into the following categories: Prescriptions, Front Shop, Home Health Care and Wellness, Clinical Services, Commission Income from a banner or buying group, and Other Income.

Breaking down these numbers by department helps with developing strategies to boost cost efficiency and profits.

By accurately tracking revenue and COGS for each department separately, gross profits for each department are also determined. Be sure to include any discounts received for making early payments. This lets you make more informed business decisions. Any business growth or declines are more clearly visible, and lets you pinpoint where any problems are in your pharmacy.

The average gross profits that you could expect for each division of your pharmacy business are:

  • Prescriptions 25%
  • Front Shop 30%
  • Home Health 40%
  • Clinical Services 100%

A clear view of your gross profit levels will help with business plan development to boost growth.  Knowing these numbers will help drive business decisions. For example, if the gross profits for Prescriptions is 20%, you are having to fill more scripts than other pharmacies to generate the same revenue. This can indicate an issue, and trigger you to investigate and correct it.

an accountant discussed to the owner the business plan development

Throughout the year, there may be pills that fall on the floor that get thrown out, items that are taken from the front shop for use in the store (toilet paper, hand soap) or even for use in prescriptions. Inevitably, some items may expire and if not marked in the system there will be discrepancies. It is recommended to do an inventory count at your fiscal year end to get an accurate count of your inventory.

At Pharma Tax, we can help you with strategic management of your inventory, to create greater cash flow and increase your profit margins. We can create overall business plans to boost your pharmacy growth.

Ricardo Ardiles
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