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06/25/2021

Part 2: Conducting an effective “closing” inventory count - Dispensary

Every inventory taking is important. When you complete an inventory count, it allows your bookkeeper and accountant to accurately determine your true margin and as a result, you to manage your business more effectively. It takes into account shrink, theft and is simply good management to do a physical count.  One also knows precisely the value of your asset, which helps you determine if you have too much or too little on hand.

“Audit” count

We see this more and more common since conscientious operators understand the merits of an accurate perpetual inventory system. Using this method, the seller prepares – usually a month ahead – by counting all the dispensary inventory and updating the dispensary software. As with the front store audit system, the buyer audits the report, checking for inconsistencies. We advocate for printing the report sorted from most expensive to least expensive items, then audit top to bottom. When the buyer gets down to less expensive items, and gets tired of auditing, the count is usually over.

“Cost file” count

This is a widespread method as well. As in the front store, a cost file is uploaded, which for the dispensary usually comes from the wholesaler. It is highly unusual for a third party to count every single tablet, and instead, they use a “10th” or “½ or full” system. The 10th system is self-explanatory, and the “1/2 or full” approach means that if the bottle is open, it is half the full quantity, and if it is unopened, it is full. The rule of averages usually works, as some bottles will be ¼ full or ¾ full, but both are counted as “½.” Surprisingly this results in very accurate counts.

There are nuances to counting the dispensary. The third-party inventory company does not typically count narcotics, and instead, the outgoing and incoming pharmacy managers do a tablet-by-tablet, mL by mL, gram by gram count. Remember, the narcotic count record sheet should be kept by the pharmacy managers, the seller, the buyer, and the “company.”

Those products in the dispensary subject to commercial terms, and where there is an agreement to discount them in the definitive sale agreement, need to be segregated in the count somehow. There are many different methods of doing so.

Don’t forget the unclaimed prescriptions and their associated unpaid copays. Although this should be added to the accounts receivable in the closing financial statement, they are often added to the inventory count for simplicity. There also may be a significant amount of inventory in pre-made compliance packaging – make sure you have a plan for counting this.

Other than goodwill, inventory is likely the most valuable asset of the pharmacy. Being prepared for the inventory count will lower stress for all parties and reduce the time needed to count the stock. There is enough tension and things to do around closing a deal, so avoid having a botched inventory count consume you. Of course, we have spoken in generalities, and all inventory counts are slightly different. What they all have in common is they are always more tedious than what you were expecting. Minimize the stress, and the time to complete by using the following principles:

Buyer and seller should agree on stocktaking methods and margins if applicable, well in advance

  • Choose a date for stock taking (usually on the day before closing)
  • Book the inventory company well in advance, and re-confirm
  • Communicate the plan to the inventory company
  • Organize the stock well in advance (and ensure labels, if your inventory method requires it)
  • Pull expired stock, and discount and sell off older stock
  • Pre-count and clearly label boxed up seasonal items in the stock room

Part 1: Conducting an effective “closing” inventory count

 

MikeMaxpic

Mike Jaczko, BSc. Phm, RPh, CIM®, FEA, a pharmacist by background, is a portfolio manager, partner and member of KJ Harrison Investors, a Toronto-based private investment management firm servicing individuals and families across Canada. For more information on this topic, email [email protected] or visit www.kjharrison.com.

Max Beairsto, B.Sc. Pharm., MBA, CVA is a pharmacist and valuation analyst with Enterprise Valuators Corporation (EVCOR), an Edmonton-based business valuation firm that focuses on business valuations and sale advisory of small and mid-sized private companies. You can reach him at [email protected] or visit www.evcor.com.

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