A Pharmacy's Guide To Optimizing Cash Flow And Stock Levels [The Inventory Turnover Ratio]

The inventory turnover ratio indicates how frequently stock sells within a specific period. Others refer to it as the stock turnover ratio. The number shows how efficiently you are managing your pharmacy stock. You can calculate the number by dividing the cost of goods sold (COGS) by the average inventory value of the period. You can establish the ratio as a KPI (Key Performance Indicator) for your pharmacy to measure how well your pharmacy is operating. You can combine it with the ABC product grading system to optimize your pharmacy's inventory levels. The period in the formula is usually one year.


The annual inventory turnover ratio for retail (community) pharmacies is between 12 and 13. The goal is to sell all your inventory at least once a month. Your pharmacy business may be in trouble if this figure falls to 7 and below. Achieving the goal means your pharmacy shelves should hold a maximum of a month's stock. Remember this is an average ratio across all SKUs (Stock Keeping Units). A product staying longer on the pharmacy shelves may require you to implement the ABC analysis to prevent it from expiry. You can choose to work with organizations specializing in liquidating short expiries whenever you face losing cash due to slow-moving or short-expiry stock.


A higher inventory turnover ratio means you are selling your pharmacy stock quickly. Your pharmacy is liquid, meaning cash flow is probably good. The challenges could be insufficient stock to manage the sales rate. Work with your suppliers to ensure you don't miss essential stock, which could translate to a negative customer experience. Higher inventory turnover ratios are critical for pharmacy products with low margins. Maintaining a high inventory turnover ratio means your pharmacy is adept at swiftly adjusting to customers' preferences. Your pharmacy is not overspending on the stock.


A low inventory turnover ratio for your pharmacy means the stock stays too long on the shelves before selling. You may experience cash flow challenges, and expiries are a real risk. Remember, inventory is idle capital until you sell it. A challenge pharmacies face is taking up offers from wholesalers on products that are not Grade A, as per the ABC analysis of products. A low ratio may also mean sales are weak. Use the ABC grading system to determine if you need to run a sale. Keep to the guidelines of the regulator when running promotions.


Tips On Maintaining A High Inventory Turnover Ratio For Your Pharmacy

  1. Forecast your inventory demand. You can use systems that do this automatically to reduce the workload. Get one that keeps up with the trends, that is, dynamic. Some systems share reports that keep you abreast of your pharmacy activity over the last 28 days.
  2. Get an inventory management system. The nature of retail pharmacy is an expansive array of SKUs (Stock Keeping Units), sometimes running into thousands. Trying to keep up with these items manually runs the risk of burnout. Manually staying current with the changes in the inventory turnover ratio may be a substantial challenge.
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