Maximizing Your Largest Expense – Inventory
Owning an independent pharmacy is not easy. Pharmacy owners have misreported inventory by millions of dollars, says Scotty Sykes, CPA, CFP®. Jared Barton of Inventory iQ* tells us how we can rectify the situation by putting the time and effort into the foundation of a perpetual inventory system. Hear how you can add this to your pharmacy and fix your inventory issues, on the latest The Bottom Line Pharmacy Podcast.
*Inventory iQ is not a client of Sykes & Company, P.A. and no employees of Sykes & Company, P.A. were compensated to talk about this third-party service. The Bottom Line Pharmacy Podcast is for educational and entertainment purposes only.
The Bottom Line Pharmacy Podcast is your regular dose of pharmacy CPA advice to fuel your bottom line, featuring pharmacists, key vendors, and other innovators.
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This episode was recorded prior to year-end December 31, 2022. If you prefer to read this content, the video transcript is below.
Scotty: Welcome, everybody, to another episode of the Sykes Bottom Line Pharmacy Podcast and today’s episode, we have got the legendary Jared Barton with Inventory iQ. Jared, you have been around pharmacy a lot. You have been into tons of pharmacies all over the country, working on inventory, helping them with managing that all-important asset in their pharmacy. So, I cannot wait to hear all about it. Welcome to the podcast. Glad you are here. Welcome.
Jared: Yeah, I appreciate you guys having me. And I enjoy the talks we get to do even though they are few and far between. Everybody is busy, right? And there is a lot of work out there to do, so we have to stay at it.
Scotty: Oh yeah, that is for sure. I know we are keeping some of you guys busy over there with some planning before the end of the year. And speaking of which, you know, we always want our pharmacies to get those inventory counts done before the end of the year because if you get it done on 12/31, you get the adjustments in January, you might get hit with some surprises and the tax planning, maybe you did, is out the door because you cannot do much after the end of the year. So we like to get those inventory counts done before the end of the year. But Jared, kind of give the listener who may not know about Inventory iQ kind of what you guys do.
Jared: Sure, sure. And there is still a few days open for the end of 2022. If you need to get that tax planning or that count done, you know, “@” me on Facebook, call me, text me, send up a smoke signal. But we try to be a one-stop shop for everything pharmacy inventory related. This business was grown, was born out of an independent pharmacy my partner still owned. Their dad started it in 1985. It is in Bessemer, Alabama. It is about 10 miles from our office here. And really, out of a need to provide greater transparency within our own pharmacy and to help us, you know, to give us a management tool where we could track our largest expense and our largest asset. From there, it morphed into doing some perpetual inventory installations and some consulting centered around perpetual inventory for other independent pharmacies, and then we had kind of an add-on service at that time for some of our stores that had gift shops associated or large over-the-counter presence and things like that and they wanted to not have us coming in and handling their prescription side and someone else handling their over-the-counter side so we transitioned into that as well. And most recently, we have spun off a sister company that focuses on the procurement side of inventory, trying to maximize getting the best prices for things you have to buy outside of your prime vendor agreement, whether that is an out-of-stock or something that your primary may just be out-of-line on. So we are really trying to take it from start to finish through the whole process, make sure that you are buying great, you are managing great internally, you are dispersing to the patient in an efficient way and trying to help as many pharmacies as we can.
Scotty: From start to finish.
Jared: We are trying. We are trying.
Kendell: So Jared, are you traveling yourself these days?
Jared: I go out occasionally, here and there. I get some requests, some of our customers that have been with us six or seven years and remember the time I last spent a lot of time on the road for the first four 1/2 or five years I was here. And so, some of our customers there go, “Well I do not know if I am going to do it unless you come up here.” And I am like, guys, come on, you know?
Kendell: Come on, man.
Jared: I cannot go to every single one but I mean, I think it is a testament, too. We have built a lot of great relationships. We have had the opportunity to help some people out of sticky situations. We have also had the opportunity to help some people go from above average to stellar performance. I think that that builds lasting relationships and I think ultimately, that is a good sign.
Scotty: What is the most common, I mean, you mentioned stellar performance there, Jared. What is like, kind of the most common thing you see in pharmacies holding back a pharmacy in terms of inventory or not managing it properly?
Jared: We see a lot of, especially as we transition to an even more electronic age, we see a lot of hesitance, I guess would be the correct term to utilize the technology that we all pay for every day. And so, you have got a lot of money and a lot of time, a lot of effort tied up in learning a pharmacy management system and not leveraging the abilities of that system to their fullest potential. We see quite a bit. And for us it could be a small sample size, but for us, it is when we help somebody transition to perpetual inventory but maybe there is some old habits there as far as manual ordering, and that is typically in the best interest of the patient, right? That is how that kind of comes through in workflow is people want to make sure that they are special ordering this item so I know it came in, you know, instead of trusting the system and making sure that our workflow is tight and everything is working the way that it should and that typically creates some balloon in inventory. We see that holds some people back from really maximizing those inventory terms.
Kendell: I have a question. So if I understood correctly, you said it is the hesitancy to leverage items that they have already paid for. So just to clarify on that, a lot of the tools that people can use are things that they already have in house, but they are just not willing to utilize the tools that they already have in place. Is that what you are saying?
Jared: Yes, absolutely and that is just from that pharmacy management system, that software suite that I think a Pioneer, an Rx30, a Computer-Rx or Liberty. Those systems are incredibly robust. It takes a little bit of a deep dive and sometimes, it takes a little trial and error to get it to work because independent pharmacies, by nature and by definition I guess, are independent. Everybody has their own way of doing things. And so we just see people not want to either dig down in the weeds or worry about making a mistake and sometimes that is on the staff pharmacist or the technician level as well, that you have a poor interaction, so to speak, with a particular patient and instead of trusting our system to order this item when we run the prescription, I am going to make sure that we get that item for this patient because I do not want to have that interaction again. We see that create a… when you sprint that out across five to 10 to 15, 10 team members, that starts to really create an inventory problem that could have otherwise been avoided.
Kendell: Oh, wow.
Scotty: Bottlenecks, extra time and it goes on from there.
Scotty: Extra money because that extra inventory sitting on the shelf is $100 bills that is not in your bank account.
Jared: Exactly, and that is the measurable metric that we can see is as that inventory starts to creep and we start to dig into it and we see multiple one item orders or something like that on the wholesaler platform, I know the system did not create these because we are not running that many orders a day. So what happened here? A lot of times it is kind of very obvious what is going on.
Kendell: And I like the wording you use. You said that is the measurable item. I know even for our line of business, the measurable item a lot of times is a tax savings but then when they become a part of Sykes and Company, P.A. a lot of times the things that people stay for are not measurable, like the comfort of knowing your tax liability early on or different things or knowing my accounting is done in a professional way. Those are not measurable, but that is the reason why people stay. For your line of business, I can imagine that it would be hard to dive into a system that you are not familiar with. And do you feel like that is something that people enjoy from Inventory iQ is having that support and getting those things going or beyond just the measurable items which is reducing their inventory?
Jared: Sure, and we really see it be about half and half, right? The comfortability of having somebody you can call, having someone you can lean on to ask questions to, whether it is about the pharmacy management system itself or hey, I am thinking about doing this thing with my workflow or just an off-the-shelf inventory question. We see about 50% of our customers that is actually what they gravitate to and I would have lost money on that wager. I am a numbers guy, I am an analytics guy and so, my thought always was the return on investment that we provide to a store that is not quite where they want to be. Maybe they are holding too much inventory but do not really know how to transition. I would have thought that that was the main value driver to our customers. And we did a survey in 2021 of those as we rolled out a new consulting service and it was really about half and half and I was shocked. But it is also changed the way that we approach some of those people as well, which I think is good. You know, if we know that somebody, maybe they are later in their career and they are not servicing any debt on the business, they have been established for quite some time and they are not as tied to, I want to run this thing at 27 turns a year and maximize every cent, but they are more at that point where they want to do community outreach, they just want to know that we are keeping an eye on things for them, I am willing to give them that latitude where three or four years ago, I would have really been leaning on them. “We got to lean this thing up, we got to lean this thing up.” And now I recognize that there is something different for everybody that interacts with us.
Scotty: So what services do you have, Jared? You have got the actual, where you guys go in and count the inventory, but you mentioned a consulting service. Kind of dive into those service levels.
Jared: We have two versions of that count. And so, the one that we do in conjunction with some of your customers, a lot of time, is an audit count or an estimated inventory count. And those are designed to give credence to, if somebody has a perpetual inventory in place, let’s make sure that that is staying accurate so that you all have good numbers to report on and to help with tax planning on. We have another version of that when maybe those perpetual accounts have drifted from accuracy in a large way that is a unit-by-unit where we come in, count everything down to the tablet, capsule, gram, milliliter, and then put that back into the system so we can get them back on track. And then we provide a turnkey solution for perpetual inventory management where we come into a store that is never done perpetual, may not be familiar or may have had a bad experience in the past, look at everything in their store with that unit-by-unit account, put it into their pharmacy management system, analyze their usage, set reorder points for them, train the staff on how to utilize all of that, and then provide return suggestions for items that they are no longer using or not serving them any longer as an asset because if we hold inventory to the point where there is no use for it anymore, it is now a liability. And then we provide, sorry, we provide that consulting service. It was kind of a Step 2 to our perpetual because we recognized that for our boots-on-the-ground approach with perpetual, that carries with it a lot of cost. It is a service. So, putting people in store for a week in a land far away sometimes or maybe close, that carries with it a certain cost. But that consulting service, we were able to provide some people that were maybe at that 14, 15 turn mark, we were able to provide them a lot of analytics and a lot of return on a much smaller investment on a monthly basis and it smoothed their inventory over time.
Scotty: And with that service, you are going into the system remotely and helping them manage.
Jared: That is correct.
Jared: It has been an incredible management tool for our multi-store owners and it has been a great efficiency tool for owners that have a single store, but maybe they still have to work the bench and they do not get to look at every single little management report every day or they do not have a management team with them to bring them those reports. We are able to put that in front of them and give them a snapshot of the business on a monthly basis about managing their inventory.
Scotty: And, you know, we harp here on, it is like the company, the importance of a perpetual inventory system. You got to have it and what percentage out there are using perpetual in your opinion, and how important is it for a pharmacy to get on that perpetual system?
Jared: I think it is the number one thing you can do to ensure success in your business. When we look at it on just the numbers basis, I talked about being a numbers guy, on average, 78% of our annual spend in independent pharmacy is on inventory. It is cost of goods sold. And I ask people this at conferences, if there is one thing you could do to manage better, 78% of the money you will spend this year in your pharmacy, would you do it, and unanimously everybody raises their hands. I am like, it is not true. You know, and it is tongue-in-cheek. I know that to be true and I know people are in all different stages of their journey. Some are brand new owners and they just have not gotten there yet. Some are three or four years from retirement and they view that to be something that their successor will do. Maybe it has not been something that they have had to do to be successful and I completely recognize that, but I do think that there is a reason that CVS, Walgreens, Walmart, you know, they have entire departments dedicated to that, entire teams. They figured out how to make money on a low margin business a long time ago, and I think that that has not transitioned in a large way to the independent market. You asked about percentages, I think it is still under 50% in my estimation. Now, I talked to a lot of those people so that is not scientific. That is not a case study.
Scotty: Yeah, yeah.
Jared: But I know several years ago when I got into the pharmacy business, the numbers were in the twenties. That is published by NCPA and I do not feel like we have converted that many in that timeframe.
Scotty: Yeah, I mean we have a similar feeling on our end when we are working with pharmacies as well, new pharmacies coming in the door.
Kendell: And for me personally, when I see the pharmacy owners that have perpetual compared to those who do not, at the end of the month, when it comes time to look at the numbers, not just the inventory number but everything, I sense a lot more confidence that those who have a perpetual system, has run correctly, meaning they look at the number and it is more of like, okay, this is how I performed. They know. The ones who do not, they were guesstimating at the end of the month. They say, well this is how I performed, but inventory could have been a little high or inventory could have been a little low. So maybe, you know, maybe we will just keep watching it for a few months and see if these numbers pan out. So I can imagine that it instills a certain level of confidence in a pharmacy owner. Scotty, I do not know if you could speak to it, but if you do not have the right number at the end of the month, how does that impact what we see when it is time to look at the numbers as far as financially?
Scotty: Oh it has a huge impact because, you know, if your inventory is off $50,000, $100,000, you know, your bottom line’s going to be off $50,000 or $100,000 and your margins are going to be off. And when you are talking about KPIs in a pharmacy, well, your margin’s your number one KPI, so you need to know that margin and if it is off, you got a problem, you know? You do not know how your pharmacy is performing relative to your peers or how you should actually be performing from a margin perspective. But in addition to that, you know, your bottom line, you could be paying tax on, you know, $100,000 of income that is not actually there. So, inventory is critical and I like what you said there, Kendell, with our clients that do have those perpetual inventory systems, which most do. They do have confidence. You do see that confidence and how they are running that inventory. They know what is on the shelf. So that does make a difference. I think you are right.
Kendell: And I got a question. So obviously I think the average person, Jared, would know how beneficial having it could be, but maybe there is just the hurdle of actually getting it done. Do you feel like, two questions, this might be a softball question or might be a fastball. I do not know, but do you feel like, paint me a picture of the time commitment that is involved with someone trying to get this set up, start to really manage it. Paint me a picture of what it will be if somebody has no experience and they are just trying to do it themself compared to like, kind of an Inventory iQ-type service. How do you help with that time commitment or, you know, energy that will be involved in getting this going and running?
Jared: Sure. And that is the No. 1 thing that we see when people either do a do-it-yourself type thing or is compared with having us come in. Time in the process is margin for error a lot of times. And the reason that is, is that a lot of people do not have an extra two or three staff members to allocate to this project. So it is done either on weekends when we are a little bit slower, the script volume is down, maybe it is done in the middle of the month. Some people will go whole hog and try to get the whole team in over a weekend and do that and that typically works out better and it is just because there are so many moving pieces to the inventory. In an average store, a couple hundred scripts a day, 200, 250, something like that, you are looking at 1,500 unique NDCs. And if you are dispensing and receiving product through that time, you have to track those movements in and out, and anything can happen there. And so, we actually will see people and we do a handful of services, a year where somebody calls us and says, “I am tired of trying to wrangle this thing in. Please come in and do this.” And I am like, okay, we would love to, and the feedback that we received from them is, “I have done this a couple of times and we started and by the time we got to the end, it was awry and we have had to start over and it is this revolving door because of time in the process.” And a lot of people, it takes them a couple of months. Maybe they say we are going to count a shelf a week or something like that and it takes them a couple of months to get that on as compared with, you know, if we come in and there is obviously a cost associated with us coming in. I know I have a vested interest in telling people how great we are, but it is done in two-to-five days based on the size of the store and that is complete with, if you do it yourself and you have no experience with professional inventory on that particular system, what do you do when you finish? You know, we like to begin with the end in mind. What are you going to do when you get everything counted? How do you set those reward points and things like that? So somebody that has never done it, they can do it for the first time. We have a lot of smart people in this industry, you know? Everybody that is PharmD out there went to 15 years of college and everything, is what it felt like to me and I did not go to pharmacy school. You know, I was ready to be out but we got a lot of smart people out there. If you can learn pharmacology, you can do inventory, but you have to know how to do it.
Scotty: Well, maybe that is why there are so many pharmacies out there that maybe are not on perpetual. Maybe it is a learning curve to get it going and then the time invested to keep it up and it is a lot of work. So, you know, what are some of your expert tips on, you know, best practices for maintaining and keeping this system going in a pharmacy?
Jared: Expectations, temper expectations. We find a lot of people out there that they want this to be an achievable goal. They want there to be a finish line and the thing about management that is very persistent, unfortunately, is that you may have the greatest team in the world but at some point, you are going to have to manage them. You may have the best workflow process in the world but at some point, it needs your input and we see that come to inventory management as well. For whatever reason, counts can stray. It may be because we were buying some things outside that did not get added, some returns did not get removed from the system, something like that, but I like to keep it simple. I was educated in the Alabama public school system so I have to by necessity, but I find it also transitions better when we are talking to people. At the heart of a perpetual inventory system, you have two things: You have reorder points, which is at what point does your system trigger this item to order, and those reorder points are referencing on hand counts.
Scotty: Those reorder points, that is a tricky area because it is constantly changing.
Jared: Can be. Sure. And something that we will talk about around that to polish that thought, you have got those two things and the more accurate you can keep those two, the better off you are going to be. Moving to order points, there is a million different ways to set those so, and I think that if you are trying to get started yourself or if you were to ask me how we do them, we touched on every independent pharmacy being different. I think that it boils back to the patient, what is your patient base using? And then take into account what your terms from your wholesaler are. I see a lot of people that only keep a month’s worth of inventory. You do not have to do that. Now, if everything gets here tomorrow and we know we fill this prescription once a month, let’s put that person on a sync program and I think that is the No. 1 tool we see people diminish their inventory with is synchronization or proactive purchasing, however you go about that.
Scotty: Yeah. Yes, certainly. Syncing definitely plays a big role in that for sure. We see that all the time.
Kendell: Scotty, tell me where you want to go with this. We got a hot topic to discuss, hot topic for 2023.
Scotty: Well we covered, let’s see, we covered perpetual actual counts, some best practices in there. What about, Jared, what are you guys doing? What are you guys kind of anticipating with the DIR fee changes that are coming down the road in 2024 and how are you planning that into inventory, and is inventory your largest expense in the pharmacy? A lot of money tied up in that inventory, how does that play into kind of what you guys are anticipating with the DIR fee changes?
Jared: Sure. I think that not enough people are talking about it and I stay in some echo chambers where people talk about it all the time. But that change is going to be huge for pharmacies, especially for the first six months of 2024. All those contracts, you know, and for everybody that is not familiar with that, DIR fees are going away from retro starting in January of 2024. And so what that means is that at point of sale, they are going to collect everything that they will collect for that particular claim. So all of these clawbacks that we get over time, as those insurance companies settle those claims, we will no longer get those. And, you know, I am a little bit of a cynic and I think that that would incentivize a company to take maybe a little bit more at the point-of-sale but we will not get into that. There is nothing to suggest that. That is just my feeling to make sure that they are covered. But what that is going to create is a massive-
Scotty: It is a valid feeling. It is a valid feeling.
Jared: I feel like companies that are responsible to shareholders and they have enjoyed a certain percentage, a certain margin, kind of like we talked about, it would not be in the management’s best interest and the shareholder’s best interest for them to undergo a business practice. It is going to potentially turn any of that margin loose. That is going to leave that to question but like I said, I have no scientific evidence for that. That is my disclaimer. That is just a feeling. But I do think it is going to create a massive cash drain or cash pull for independent pharmacies the first six months of 2024 because some of those contracts are settled quarterly, some of them are settled on a trimester basis, some of them are settled semiannually, things like that. And so for that time, you are not only going to be paying the full percentage of DIR at the point-of-sale for the claims that you are running today. You are also going to be catching up things that you ran in the latter half of 2023. And so, really the message there is cash flow is king. So we need to free up every available dollar, you know, we need to make sure that we are running as lean as we possibly can and we need to proactively purchase items that may be of higher cost to us that help us keep more money in the bank so that we can weather a storm.
Scotty: Yeah, we are going to have some content out on this DIR fee change in the coming months for sure. And so, Jared, what would you say is the No. 1 thing pharmacies could do, in terms of inventory for planning for this? Would it be getting on that sync program? How would you, you know, tell a pharmacy to prepare for this from an inventory perspective?
Jared: Sure. I would put a couple steps in that process. No. 1: I would make sure I was on perpetual inventory because that gives me a transparent view into the needle that I am trying to move, right? Kind of like you guys touched on with tax planning, if we have that count done on December 31, that is great but at that point, the year is done. The amount that we can move the needle on that lies with what my CPA is comfortable with, right? And that is not a good place to be in. We want to be able to affect our own outcome. So first of all, I want people to be on perpetual inventory. Once we got on perpetual inventory, I would start to monitor my inventory terms over kind of a monthly average and I would want to boost those up as much as I could. There are a couple of ways to do that. You can schedule purchases for people that may or may not want to be synced, but I love synchronization. I think it is a measurable metric. I think it is something we can point to, we can bonus our staff on. But when you think about that, the step-by-step process of synchronization is not customer-facing. You know, so even if somebody does not want to be synced, if they want to pick up this at this time of the month or this at this time of the month, you can still purchase their medications as though they were synchronized. You do not have to make them come into the pharmacy just one time, but you can at least use the information you have to purchase their drugs more proactively. So when I say that, I am not telling everybody to go out there and, you know, grab your customers and tell them you only get to come in once a month. I am just saying, let’s utilize the benefit of it to ourselves of being able to predict those purchases and to proactively approach those purchases and let’s serve our customers the way they want to be served.
Scotty: From your perspective, what is an ideal sync percentage in a pharmacy? 60%?
Jared: That never gets too high.
Scotty: Never gets too high.
Jared: The thing is that you are never going to sync a 100%, right? Long-term care might. If I was owning and operating a long-term care pharmacy and we got to the end of the day and there were any bottles on the shelf that were not open and partial, I think I would have something to say about it. But for a lack of a better term, you have somewhat of a captive audience there and that is not a joke. That is just the only terminology I have for you.
Jared: You know what you are going to fill and you get notified by the home if there are any new patients, any new needs for you to fill something. And so from there, you can operate those stores a lot more tightly with respect to inventory management. For a retail pharmacy, we have got to keep antibiotics. You have to keep an EpiPen in there. You have to keep a Glucagon Kit. You know, anything that may be an emergency situation or something where the cost to miss that sale is not great, it does not outweigh the benefit of expiring that item, I would suggest you keep. But the way I like to start with synchronization is, let’s focus on patients at a certain dollar figure for their medications and then over time, as we get a little better, let’s start to walk it down, you know? And that is the way that we see people bolster that synchronization program because some people get to 20%, 30% and they go, “Well, where do I go now?” You know, we just need a process that we can walk down and that stuff is everchanging.
Kendell: Mhm, that is great. Prioritizing, it seems like it is not just only the percentage, but what does that percentage make up, what population that percentage makes up.
Jared: Absolutely. Beause when you think about it, it takes the same amount of time whether you are synchronizing somebody that is on Humira or somebody that is on Haloperidol. I want to sync the one that gets me the most bang for my buck in terms of time. If it takes 5 minutes for somebody to make the appropriate phone calls, if it takes 10 minutes, I would rather make a $10,000 phone call than a $10 phone call.
Scotty: For sure.
Jared: As it pertains to my management, so.
Scotty: How about robotics? Jared, how does robotics fit into all this?
Jared: I like them at scale and I have talked to people on both sides of the process. I know guys that do 700, 800 scripts a day and would not buy a robot or would not let you put one in their store if you gave it to them. I know folks that are at 200 a day that absolutely love, you know, their Safe or their Parata Max or their ScriptPro 200. I think at scale, it makes sense. You know, we see there is kind of a stair step in pharmacy payrolls where if you have one pharmacist on staff and a technician or two, you can turn out a certain number of prescriptions responsibly. You have to take a leap of faith if you are on the right road trajectory, to hire that next one because your payroll kicks up and it may not be commensurate with your sales increase. And so, I think if you get into some scenarios where you are kind of in-between but you have got a really high-performing pharmacist or you have got some good hours, you have got a good workflow process, I think you can supplement with robotics and maybe utilize those at some creative times of day so that it is not bottlenecking your process or monopolizing one of your technician’s time and really make the dream work that way.
Scotty: Yeah, I think robotics can be very valuable in a pharmacy, especially with labor costs the way they are and with pharmacies actually going beyond just filling scripts nowadays and getting into other revenue opportunities, other clinical-type services, it requires more time and effort from that perspective as well that automation and robotics could supplement.
Jared: There are two schools of thought on that. The guys that are in favor of them say, well, that robot never calls in sick, never takes a day off and everything and the folks that are not in favor of them would tell you, yeah but it does not answer the phone and it does not create any relationships. So when used properly, I think they are great.
Jared: And I do not have a dog in that fight because mine does not break down on me Monday morning, at 10:30, and cause me any headache.
Scotty: Yeah they do have those maintenance issues, but, you know, that is just the way that is.
Jared: That is every machine out there. I do not want anybody to think that I am down on robotics because I love them when I think the plan is in place.
Scotty: Yeah. Good point. Jared, you are not on the road as much these days, right?
Jared: Oh, not as much.
Scotty: You just got married, so I imagine those days of being on the road all the time are few and far between nowadays.
Jared: I can tell you there is far more discussion when I come home and say I am going to Greenville, Mississippi. And she is like, it is not duck season. And I am like, no it is not. It is June. But, you know, we have been together a long time. We did not meet until we were a little bit older. She was in grad school and I was still working. I was still working in and around the Auburn area after I graduated. And so, we were not used to being right up under each other and we are both very independent. You know, I got the best wife on the face of the planet, but we did a long distance relationship for a while because she had a job in Pensacola and I moved to Birmingham to start with Inventory iQ. And so, that created somewhat of an independence and also a fondness and an expectation that we would not be together 24/7. But I will tell you that as we have combined households and she has gotten used to it, it is not as easy to pick up a duffle bag and go to Kentucky or somewhere of that nature.
Scotty: Well, congratulations on that. That is awesome.
Kendell: Yeah, congratulations.
Jared: Thank you. I appreciate it.
Kendell: For sure, that is wonderful.
Jared: What about you guys? What is new with you? I mean, it is the end of the year.
Scotty: Yeah. Well, we have been just knocking out tax planning, man, and just kind of gearing up for the year end and that is always a busy time. These are some of the most vital calls we have this time of year with our clients. And so, just hanging in there.
Jared: I was going to ask that. Do you feel like you get more out of the process, or I guess not really you, but do you feel like that the customer or the pharmacy gets more out of the process in Q4 than they get in Q1?
Scotty: Q1 is compliance, so we are ready. When we are in Q1, we are looking at Q1 that year. We are not worried about the prior year. I mean, prior year is right now with tax planning.
Scotty: So that is why we say, you know, these are some of the most important calls we do from an advisory standpoint and tax planning standpoint and things like that, so.
Jared: I am trying to figure out how we can collectively yell from the rooftops in Q3 that we need to have all inventories, maintenances, audit counts, everything for planning done by like, October. Because if not, you cannot move the needle. You know, we have talked about this a lot and I still have customers that have been with us forever and I have told them this over and over and over. They love that end-of-the year-thing.
Scotty: Cut off.
Jared: I mean, there would be people, fighting one another like it was Black Friday at Walmart. Everybody has seen the videos, they are like, knocking the doors off. Over the last week of the year, I am like, “Guys, that is great, but if you have got no latitude there is nothing that you can do to affect the outcome, so.”
Kendell: Yeah, and I can say this, especially. I think here, we have been screaming that from the top of the rooftop for our clients. It has been done.
Jared: And you guys do a great job with that.
Kendell: Yeah, I think most of our clients know like, they get on call and they are like, “Oh, I need to make sure my numbers are tight for around September and October,” right? They know that that is when they need to know that their numbers are real tight so that they can have an idea of where they stand. So, yeah. Yeah, we have been screaming it. We have been screaming it, also.
Scotty: I feel we also screamed that perpetual inventory because you need to have that in there. It is vital, you know? Again, that inventory is your largest expense. You need to be keeping tabs on it. You need to know exactly what is going on. You need to be syncing what you can and keep it as lean as possible. Get that cash in the bank, so.
Jared: I am thinking about it from a management perspective. If inventory is 78%, what do you guys see on payroll? 10 to 12?
Scotty: 10 would be the ideal.
Jared: 10? Okay. 10 would be ideal. And I would say less than 78 would be ideal, too. And some guys, you know, there will be some multi-store owners listen to this and go, oh man, I am way below that. And well, you are behind on volume, you know, so you should get a little bit better deal. But we will just take that average of 78 through 10 for payroll on it. You cannot move the needle anywhere else. It would be difficult, you know, to move the needle with marketing,
Jared: Advertising, that type of stuff. it is just, you almost cannot get lean enough on that to make up for inefficiencies in the other two.
Scotty: Yeah, I mean when we are talking to pharmacies is, you know, most pharmacies do not have any problems with expenses. I mean, and they do not move the needle, like you said, you know? If you are trying to move the needle in a pharmacy, it is either inventory, cost of goods or payroll. I mean, 100%. And that is why that margin percentage is so important because, you know, that is that inventory, that is that cost of goods. It is crucial, so.
Jared: What is the outcome on that? I know you talked about overpaying, but we do a handful of inventory counts every year where maybe somebody has not had their inventory counted in 10, 15 years and do not know and we see it go both directions. Sometimes it is, yeah, we got about 200 in here and they have got 400. And sometimes it is, yeah, we got about 400 in here and they have got 200. Obviously in one scenario, you are overpaying; in one scenario, you are underpaying. How do you reconcile that once you get that data?
Scotty: Well, there are a couple ways you could do it, I guess, but that is where it gets a little tricky because if it goes into prior years, you know, how do you want to handle that from a tax perspective, amend a tax return or flow it all through the current year? So that is kind of a case-by-case basis on how to handle that. I mean, we have seen pharmacies come through the door. They had…this one pharmacy had $1.2 million on the books for tax purposes for inventory and they had actually [$200,000.] So it was overstated by $1 million and this client chose to flush it through the current year and he was under audit from a prior year when he came to us and it passed the audit, but they did not question the adjustment that was made. They just, you know, inventory was wrong and they adjusted to actual, so. But again, in that scenario, that pharmacy, you know, paid tax on $1 million essentially that was not there. So, I mean.
Jared: I did a follow-up. The reason I asked this question, I did a follow-up last year in Texas and we were in a very similar situation. They had $2.5 million or $3 million on the books, I believe, and when we finished, I want to say it was $1.6 million or something. And this is not an estimated audit count. This is not an estimated audit count, this is a, “To the unit, I counted everything in here. There is no doubt.”
Jared: And so, this is a rather large organization and they have in-house accounting staff and so, we want to talk about in-house accounting staff running around getting ready to melt down. And the good thing was they had a third party prior that came in and did it prior to us and that is where they got that number. So it was not anything nefarious or anything like that. It was just that they received a bad number and it is tough to deal with, sometimes.
Scotty: It is.
Kendell: Yeah. You definitely do not want to be on the side where you are like, “I have overpaid over the past course of so many years on $1 million of tax.” Or you do not want to be on the side where you are like, “Over the past couple so many years I have underpaid and now am I going to pick up all of that in the current year and or am I going to be just looking over my shoulder for an audit?” You know, so it is just a much better thing just to get it right. Just nail it down.
Jared: And that was kind of the source of it. For them, it was short-lived. They did an annual inventory. They got a bad inventory figure. Fast forward to present day, they have a good inventory figure so that is fine. But some folks we run into had not had it counted in 15, 20 years and I am like, “Man, at what point do we think it got off? When did it stray from accuracy? How would you unwind to that?” Because, you know, my undergrad, I am not a CPA, but my undergrad was in accounting. And so, I think about some of the aspects of that as it pertains to you guys sometimes. I am like, ooh, I am glad I do not have to do that.
Scotty: Yeah, I mean usually, I would say most of the time you are going to flush it through the current year, but yeah, I mean, you may need to amend some tax returns in that case. It just depends.
Kendell: So, I was just going to say, usually, I forget to ask, if someone wants to get in touch with you, what is the best means, like website, email?
Jared: Sure. Yeah, you can find us at inventoryiq.net. Our phone number is 1 800-253-2013. And if you want to email me directly, my email is j.barton, B-A-R-T-O-N, at inventoryiq.net. So if you go out there too, we are fairly active in the Facebook groups, sometimes you will see me interacting as myself. Sometimes you will see us interacting as Inventory iQ based on what group it is, what page it is. So yeah, we would love to talk to anybody involved. If you do not know where you stand, we do a free inventory analysis to try to catch you up on what we might do together, where we think you might be able to go, or if you are peachy keen and, you know, we will release you back into the wild, so.
Scotty: The best in the business, Jared Barton and Inventory iQ, that is for sure. Appreciate all you do for our clients, Jared.
Jared: Yeah man, thank you.
Scotty: I know you work with a lot of them and keep up the good work. So when we wrap up here, we always like to do the bottom line. So Jared, let’s let you kick it off. What would be your bottom line takeaway from today’s conversation and our listeners out there today?
Jared: Sure. Bottom line is just, let’s begin with the end in mind and that means whether we are undertaking a project or we are going into a new year, be that a tax year or just goals for our business in the coming year. We touched on something that is going to take effect in Q1 of 2024 so as we near the end of ’22 here, we will start to think about what you can do in 2023 to be prepared. I always say I have a very vested interest in the existence of the independent pharmacy just because that is the only vein of business that we serve here. This is a group of people that is near and dear to our hearts, so I want to see everybody have a prosperous 2023 and 2024. If there is anything that we can do to help, we would be honored to help you.
Scotty: Awesome, yeah. I would say my bottom line here is, 2023 would be a good time to really, if you have not already, get that inventory tied down, devote some time to it, put systems and processes in place to do everything you can to manage and keep that lean and be prepared for, again, maximizing your cash and the DIR fee changes that are coming.
Kendell: Yeah, my takeaway is if you have not had inventory count in 15 years-
Jared: I like where this is going.
Kendell: Well, if you do not know anybody who is on perpetual, let alone have it in your store yourself, I think there is a lot of analytical reasons because you are out of cash flow reasons and then there is a lot of emotional reasons regarding stability of your business to at least take a step in the right direction. You might not go full-fledged, but just take a step. Just get started on that journey. And it might be a journey that is fast or slow, but just take a step. This is a journey you want to start.
Jared: Sure. I like to encourage our team to run in whatever direction they think is best and the logical next question is, “What if I am going the wrong way?” And I am like, “Well if you run, you find out quicker.”
Scotty: Boy, isn’t that the truth. Isn’t that the truth. Well Jared, appreciate you coming on with us today and we will certainly have to do this again next year…
Scotty: Sometime and best of luck to you guys out there.
Kendell: Thank you.
Scotty: And to all the listeners out there, appreciate you listening in. If you have questions, comments, feel free to let us know and we would be happy to help you any way we can. Thank you all.