Taking the fear out of inventory budgets

When creating a budget, specify the goals your practice expects to achieve

Use your software to print a count sheet and then physically count your inventory.
Use your software to print a count sheet and then physically count your inventory.

Do you tend to cringe when you hear the words “inventory” or “budget?” If so, you can relate to most of the professionals within the industry.

When trying to create/monitor a budget for your inventory, a few major factors come into play. Counting inventory, turnover rates, purging inventory, reorder points, monitoring your revenue, and budgeting are all great starting points to getting back on track.

Ideally, you want to aim for no more than $15,000 in inventory cost per full-time doctor. Once you get your inventory cost under control, you can begin to set a budget to get control of your spending.

Counting inventory

One of the most important aspects of tightening down on your inventory is to physically count every item you have within the hospital. You can use your practice management software to pull count sheets to document your counts. I recommend saving these sheets for at least a year, having those physical counts help you pull sales histories to dive deeper into any discrepancies that may have occurred.

If you are not counting your inventory regularly, then you have no real idea of how much money (product) is actually sitting on your shelves. The general rule of thumb for counting inventory is to do it quarterly; or at least twice a year.

If you notice a discrepancy in an inventory item, then you can count those products more frequently, such as weekly for example, until you find the problem. Being able to pinpoint the issue with an item’s sales history will help you keep a closer eye to discover any issues sooner.

Purging inventory

After you have counted your inventory, you will want to review purchase history. Your practice management software should also have a turnover report, which shows how many times an item was turned (sold).

Ideally, you want each inventory item to turn at least 12 times a year. Suppose your turnover report says an item has turned 32 times last year, which would be a good indicator you need to raise your order points to order more of the product at once.

If you have a product that only turned twice last year, then it is time to evaluate discontinuing carrying the item.

You can also make note or highlight the low-turning items to check past sales history. Usually your practice management software will also have a cost report, which tells you the last time an item was purchased, as well as the cost per unit and total cost of each item. I like to evaluate all the products I have not purchased within the past six to eight weeks.

Maybe the item is not turning because your staff and doctors forgot you had it, or maybe it is not turning because you have a similar product and the doctors prefer the other one more. When reviewing your inventory quarterly, look out for those duplicate products and work with your doctors on this list to purge anything you are not using.

Order points

After looking into the turnover and cost report, focus on your order points. When budgeting inventory, you can choose to order for the month, weekly, or bi-weekly. It depends which method works best for your clinic.

When ordering for the month, sometimes vendors offer different payment terms due to buying in bulk or have a promotion for extra product. The only downside would be over-ordering because not only are you accounting for the cost of the item, but also the holding and stocking fee.

The longer an item sits on your shelf, the more money you have tied up in goods. Ordering for the week or even two weeks seems to be a happy medium for most.

Yes, you will have more invoices to account for, but in my opinion it helps keep a tighter grasp on your inventory numbers. You can monitor your budget and adjust ordering as needed to meet your goals for the month. Evaluating order points quarterly helps ensure you are ordering enough to last the week/month, as well as any lead time.

Lead time is the time from which a product is ordered to the time it is delivered in your clinic. When setting order points you also have to consider seasonal products such as allergy medications. Your order points will never be set perfectly for the year, so adjust quarterly. If you notice you are running out of product, raise your order points and run a sales history to estimate how much you need for your next order.

Monitoring revenue

Another important part of inventory budgeting is monitoring your revenue. Make sure you are making enough to cover the product costs. The general rule of thumb is to have no more than $15,000 of inventory per full-time doctor within your hospital. If you have more, you need to do some investigating.

Creating a revenue goal every week will allow you to adjust ordering as needed. Let’s say week one you knocked it out of the park, but week two you did $25,000 less, that would show me I need to keep ordering to a minimum to keep on track with my budget. It will also indicate I need to do something for weeks three and four to help generate more revenue.

A few ways you can make adjustments is by increasing revenue, lowering your expenses, and lowering your targeted profits (average of the last three years by month). By consistently monitoring your revenue, you can also review any issues that may arise. For example, are there a ton of discounts happening? Perhaps there are missed charges, or maybe your doctors’ numbers are not as high as usual. Those can drastically affect your inventory budget and can sometimes be hidden in plain sight. You always want to be ahead of any issues that may arise.

Budgeting

When creating a budget, specify the goals your practice expects to achieve. For example, do you want to earn more profit or simply specify the earning percentage to revenue? After figuring out your practice’s goals, you can then create a budget template.

You will want to be able to track your cost of goods into different categories and most distributors have a feature in which you can assign a general ledger code to each item. This helps on the accounting side to see how much of each category is being spent. Every time you receive products into your hospital, you will separate the cost of the items into different variable expense categories.

Typical variable expense categories are separated by drugs, medical expenses, food, laboratory, and prevention, for example. You can type in your budget each invoice separating the costs into the appropriate categories. Then use this information to see if your practice is reaching its specific goal or if you need to adjust things to get closer to your goal.

Inventory budgeting does not have to be scary! Using the hints I have provided will help you gain control of your spending and have a better understanding of your practice’s financial health. By counting quarterly, purging your inventory, adjusting your reorder points, monitoring your revenue, and utilizing a budget, you will be on your way to achieving your financial goals!

Rachel Singletary is a practice manager in Lakeland, Fla., working with Family Vet Group.

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