The Hidden Problem with Inventory Accounting
Many independent pharmacy owners do not keep a perpetual inventory and are just guessing at their inventory. In this video, Ollin Sykes of Sykes & Company, P.A. explains how to keep up with inventory. A good script management and inventory system helps control cash, gross margins and profit. Your gross profit will not be accurate if you are guessing at your inventory. Hear the main factors that can impact the accuracy of inventory counts.
If you prefer to read this content, the video transcript is below.
Well, the key reason that inventory accounting doesn’t work is that most pharmacies don’t have a clue of what their inventory, either in the prescription area or the OTC area is, because they’re not keeping perpetual inventory systems and they’re taking manual counts periodically and they’re just guessing what that inventory levels are if they’re making adjustments during the course of the year. I would say our experience is only about 40% of the pharmacies are keeping perpetual inventory systems, and with the scan systems, where you’re scanning things in that come in the back door, you’re scanning things that go out through the register, whether that be prescriptions or OTC items that you’re selling, it’s so easy to be able to keep up with inventory if you do, if you do it properly. And the tools that are available by some of these script management systems and inventory systems that are out there make it much easier to deal with than ever before because everything is barcoded.
Everything can be scanned. And when you’re doing that, you can control not only your inventory, but can control your cash, control what your gross margin and your profit is. But if you don’t know what your inventory is and you’re just guessing, then your gross profit is not gonna be accurate. And if your gross profit’s not accurate, and that’s the single most important key performance indicator of all on your financial statements is to understand what that gross profit is, if it’s not accurate because you don’t know what those, that inventory is and you don’t know what your payables are that tie into that, then you got a system, an accounting system, that’s totally out of control. There’s a chance, not only for employee error, but there’s also a chance for pricing errors to occur. And so much of this pricing information is coming in because, obviously, you’ve got quantity times the price.
So quantity is what you get through the counts. The pricing is what you’re typically downloading from your wholesalers or, you know, whoever that you’re buying from, and, in some cases, that pricing information can be flawed or be in error and things need to be looked at and reviewed. And it’s like I tell pharmacies, if you take the top 15, 20, 25 drugs that you have in your prescription area by dollar volume on the shelf and just overview the quantity and the pricing of those drugs, that may be 75% of what you’ve got on your shelf and you should be able to spot whether there’s any obvious pricing errors or quantity errors just by doing a quick scan manually. So it’s not rocket science.
Even though you may have literally hundreds of drugs’ ADC codes on the shelf, again, I bet the top 25 represent, on a dollar value basis, 75, 80% of what you’ve got there. And if you just narrow it down to these high volume dollar items to make sure that you’re doing some kind of cycle counts. That’s what that’s called, typically, for the pharmacies that are keeping perpetual systems in place. They’re performing periodic cycle counts to verify what they have on a shelf. And maybe they have four pharmacy shelves. They’re counting one shelf every four months that’s being counted so they don’t have to stop what they’re doing and count it all at one time. But there could be pricing as well as could be quantity errors, and, yeah, they can occur all the time which is why you’ve gotta keep your eyes on it continuously.