Below the Surface: Take a Deep Dive into Inventory Management

I often see practices laser-focused on sales, unaware that without an understanding of inventory, they lack a true perspective of their business. When considering all the day-to-day procedures, expenses, and (quite frankly) fiascos, it’s no wonder inventory is often overlooked. I’ve found this to be especially true if a practice’s management system is limited in its ability to track and report inventory. While it’s true that pulling reports and manually tracking products is a time-consuming process, doing so provides valuable insights into trends that will ultimately allow your practice to make better business decisions.

Tracking for Success

By looking just below the surface, you can gain a deeper understanding of your sales trends, financial controls, and practice health, which creates substantial competitive advantage. Increase your chance of practice success by following the recommendations below to manage your inventory effectively—everything from supply to reporting.

1. Understand Current Inventory

Classify/streamline your inventory. Repeat after me: Not all inventory is the same.” It’s possible to go beyond the standard “first-in, first-out” inventory principles and make your inventory tell you an informative story that extends far beyond expiration dates. Classifying your inventory into three color codes (based on popularity) is an eye-opening experience.

• Green: Your top 10 percent revenue generators such as services (e.g., fillers) or products (e.g., creams). All inventory or service line(s) in this bracket should be regularly invested in and marketed to both the new and existing patient base.
• Yellow: Your “Steady Eddie” products/services that constitute 80 percent of your inventory. As you invest in, educate to, or market these items, you’ll want to monitor spikes and drops, identifying which ones start to climb to the top of the ranks.
• Red: Your bottom 10 percent inventory, consisting of items that need to either “shape up” or “ship out.” When new products/services come in, the inventory in this category should be the first to go! Streamline your offerings by replacing a product or service with one that better resonates with patients.

Account for free goods. Think of free goods as promotional inventory. As such, they should be accounted for separately from your paid inventory. By tracking your free goods and not lumping them into your paid inventory records, you reduce the risk of lost/stolen goods and inaccurate inventory levels and book balances, respectively. Free goods should be used as incentives for training, promotional, and staff reward purposes, with the ultimate goal being to help drive the products/services that you did purchase. This will ensure free goods live up to their designation of promotional inventory.

Manage run rates. It’s likely your practice analyzes day-to-day or monthly sales numbers autonomously. Yet, comparing sales against inventory performance is an analysis ripe with data, providing a completely new perspective. For example, let’s say a practice tracking a month-long “Buy two, get one free” filler promotion made $100,000 in revenue sales in its filler category, sold 125 units of paid inventory, and gave away 40 units of free goods. Knowing this, the practice can now compare this data to other months to determine if the promotion was beneficial.

Additionally, keeping track of inventory categories month-over-month helps to identify trends, determine the potential “why” behind trends (i.e., a promotion), and monitor inventory levels—all allowing you to better plan for future inventory investments, including a course-correction as needed.

If you don’t have a software management system that can track monthly inventory on categories (like filler) or individual product sales, begin with tracking how much of your Green inventory sold; it’s a great place to start that won’t bog you down administratively.

2. Establish Purchasing Protocols

Set Periodic Automatic Replenishment (PAR) levels. PAR levels, also known as safety stock, is the minimum level of inventory needed on hand to meet expected and unexpected demand in a given period. These levels are calculated using monthly run rates, scheduled patients, order arrival time, order minimums, and emergencies. When your inventory for an item dips below its PAR level, a restocking order should go out automatically. Establishing an automatic replenishing ordering system will help keep your practice running efficiently. Without it, you can experience missed sales, lost time and wages, overstocking, and ultimately, valuable cash flow being tied up in overstock of non-moving SKUs.

Establish regular ordering patterns. Another purchasing method to control your inventory is establishing a standing order. Ordering consistently at specific time intervals (whether monthly, semi-monthly, or weekly) is ideal. Take it a step further by picking a specific day (e.g., the third Tuesday of every month) to place your inventory order and schedule a reminder on your calendar (if necessary). Consistent ordering helps you establish more accurate run rates, take advantage of bulk discounts, and space out payments. For larger inventory/systems—or to space out when bills are due—rotate your inventory ordering category weekly (e.g., Week 1: retail; Week 2: injectables; Week 3: fillers; Week 4: consumables and medical supplies). When placing orders, pull reports and base them on run rates and PAR levels, as this will save you a tremendous amount of time, money, and stress!

Plan for additional inventory. While your inventory order will remain fairly consistent, vendor specials and the opportunity to purchase new products will naturally arise. If you take advantage of a vendor sale by buying more inventory than normal, determine how far off you are from your normal run rates. Then, set a goal and timeline to move through that inventory, and if available, use free goods to offset the promotion or incentivize employees to push the surplus. If you plan to invest in a new product/service, determine which slow or non-moving inventory item is tying up cash flow and prepare to phase it out (preferably before you take on new inventory). Be sure to set goals on what the new line or product should achieve and loop staff in on what it will take in sales from them to bring in the new line. Knowing which inventory contributes to your revenue, how often you run through that product, and when you replenish will allow you to take advantage of offers that are strategic for your business.

3 Determine How To Account For Inventory

Correctly account for your inventory

How your practice records inventory when it’s purchased—whether as inventory on your balance sheet or cost of goods sold (COGS) on your profit and loss (P&L) statement—impacts the accuracy of your financial statements. A common mistake practices make is recording the entirety of purchased inventory as COGS, even before that inventory is used. In that scenario, if you make a large inventory purchase before the end of the year and haven’t yet sold that inventory, you may record COGS that haven’t been used to generate revenue. This can result in an overstatement of expenses and understatement of gross profit (revenue minus COGS). In addition, you’ve left an important component off your balance sheet—the inventory you haven’t sold but still own.

Recording purchased inventory as an asset and moving it to COGS as you use/sell it is a generally accepted accounting principle (GAAP) that can help you determine the following:

• The true value of practice assets,
• What product should be on your shelf (to help evaluate internal controls around theft), and
• How profitable an individual service line may be for your practice.

Let’s compare these two accounting methods to see how they impact financial statements. In Example 1 (page 18), assume you purchased $100 of a product in December and only used $50 of it while generating $100 in revenue that month. If you recorded the entire inventory purchase as COGS, your gross profit would be $0 ($100 in revenue - $100 in purchases) on your P&L statement; your balance sheet would reflect $0 in inventory.

Meanwhile, Example 2 (page 18) assumes you recorded the $100 in purchases as inventory on your balance sheet and only moved the $50 that was used to COGS. As a result, you would show a $50 gross profit on your P&L ($100 in revenue - $50 in purchases), and your balance sheet would reflect the remaining $50 of inventory you’ve not yet used or sold.

Look Beneath the Surface

As a leader of your business, you can look at inventory management as a burden or an additional data point to help guide your decision-making. Inventory that is effectively overseen and regularly referenced provides a more comprehensive understanding of your business. This will allow you to ask better questions (and hopefully have more answers) around inventory trends and supply to make better purchasing decisions. Therefore, the next time you are evaluating your sales numbers commit to bringing your inventory data and metrics to the table, as well!