Inventory Business Calculations

Key Points Recap

Introduction
Description  Inventory values, such as average inventory and inventory turnover rate are provided
to pharmacy managers through reports.
 Calculating these values wouldn’t be a typical task you’ll perform. However, you’ll need
to know how to perform them for your national certification exam.

Key Terms
Description  Inventory
‒ The entire stock of medications on hand at any given time in the pharmacy.
 Average inventory value
‒ The value of the entire stock of medication on hand in the pharmacy, over a period
of time. Average inventory can be a useful estimate for businesses to determine
how much inventory has been used over a period of time.
 Inventory turnover rate (ITOR)
‒ The number of times the pharmacy sells through its stock of medications, over a
period of time.

Average Inventory Value

Description  “Inventory” is the entire stock of medications on hand at any given time in the
pharmacy.

 An inventory count is required at least once a year to check the business’s net profit.

 Inventory records and reports are usually kept electronically through the pharmacy’s
computer software. However, some pharmacies may have to manually calculate it.

 It’s important to know how long your inventory sits on the shelves.

‒ You don’t want inventory to sit too long on the shelves because products expire.
When medications expire before they can be sold, it costs the pharmacy money.

‒ On the other hand, you want to react if a medication is moving very quickly.
Running out of medication or placing last-minute orders to replenish stock also
costs the pharmacy money in lost business or higher shipping costs.

 Work with your pharmacy team to find a happy medium, so you keep shipping costs
down and have full shelves, but don’t have products expire before they’re sold.

Copyright © Therapeutic Research Center, LLC. All Rights Reserved. Pharmacy Technicians University
 Inventory Business Calculations
Key Points Recap

Calculating the Average Inventory Value

Description  To determine how long inventory lasts on your shelves, you first need to calculate the average
inventory value.
 To find the average inventory value, you need to know the initial inventory and the
ending inventory.

 Then, use the formula: Average inventory = (Initial inventory + ending inventory) /
2.

Example  Your pharmacy ran its inventory today. The initial inventory value was $145,000. The
ending inventory value was $55,000. What’s the average annual inventory?

 Use the equation: Average inventory = (Initial inventory + ending inventory) / 2

 In this example, that gives you: Average inventory = ($145,000 + 55,000) / 2

The pharmacy’s average inventory is $100,000.

Inventory Turnover Rate

Description  “Inventory turnover rate,” abbreviated ITOR, is the number of times the pharmacy sells
through its stock of medications over a period of time.

 It’s a good way to tell how well your pharmacy is selling is inventory, and can also be
used to manage stock efficiently.

 The ITOR will tell you if the inventory needs to be increased or decreased.

 A good ITOR for community or independent pharmacies is between eleven and twelve.

‒ If your inventory turnover rate is low, such as a five, your pharmacy is possibly
buying too much stock, medications are sitting on shelves for too long, and not
many patients are getting their prescriptions filled there.

‒ If the turnover rate is high, such as twenty, then you may want to increase the
amount of inventory to prevent having to reorder medications often.

 It also means medications on the shelves aren’t staying there long, and patients
are buying them, which is good for sales.

Copyright © Therapeutic Research Center, LLC. All Rights Reserved. Pharmacy Technicians University
 Inventory Business Calculations
Key Points Recap

Inventory Turnover Rate Calculations

Description  The inventory turns calculation (cost of goods sold divided by average inventory cost)
measures the number of times you sell through your inventory during a given amount
of time. Usually, we measure inventory turns by the year.
 Cost of goods sold: The amount the pharmacy paid for the goods (for example,
medications) sold to patients. This includes the price the pharmacy pays for the
products as well as shipping and other expenses.
 Now that you’ve calculated the average annual inventory, you can use that to
determine inventory turnover rates.
 To determine a community pharmacy’s inventory turnover rate, you’ll divide the cost of
goods sold (COGS) by the average annual inventory.

Example  Your community pharmacy had its annual inventory. What’s the inventory turnover
rate?

 Your initial inventory was $50,000, and your ending inventory is $25,000. The
pharmacy’s cost of goods sold was $700,000.

 Use the formula: ITOR = COGS / average annual inventory.

 First, we’ll need to calculate the average annual inventory.

 Use the formula: Average inventory = (Initial inventory + ending inventory) / 2.

 That gives us: Average inventory = ($50,000 + 25,000) / 2. The average inventory is
$37,500.

 The average annual inventory is $37,500. You know that the cost of goods sold is
$700,000. You can fill in the inventory turnover rate equation.

 ITOR = COGS / average annual inventory

 $700,000 / $37,500 = 18.7

 The annual inventory turnover rate is 18.7.

This means your pharmacy sells its inventory almost 19 times.

Copyright © Therapeutic Research Center, LLC. All Rights Reserved. Pharmacy Technicians University