- The Goldilocks Stock Level for your Final Years
Most dental practices believe that keeping about a month’s worth of consumables in their cupboards at any one time is just about right. This is generally seen as a safe buffer of stock, where you don’t feel like you are going to run out of anything and you aren’t creating an unnecessary drain on short-term profitability and cash on hand.
However, there are times that practice owners are faced with valid business reasons to buy stock in bulk and fill the cupboards with 6-12 months’ worth of gloves, endo files, implant componentry and/or other supplies.
To understand this issue, let’s start by analysing the reasons why a dental practice might buy far more stock than it needs in the short term:
- Many suppliers offer discounts if you buy in bulk. A practice owner may decide to take advantage of these deals and trade short-term profitability for long-term profitability.
- There may be a limited-time sale on some supplies that are used in the practice. The practice owner may decide to buy in bulk while this offer exists.
- Remote practices may like to have excess stock on hand because deliveries at short notice are not possible. Buffer stocks minimise the risk of being short on stock when it is needed to treat patients.
- Some practices buy big at end-of-financial-year sales, in order to reduce their tax in one tax year and push them into the next. Prepaid expenses (like rent, interest, insurance, stock, etc.) are claimed when paid, so if profits are up in the current financial year, some practices will prepay these expenses and buy stock in advance at EoFY sales, in order to get the deduction in the earlier financial year.
While this decision to buy stock in bulk may make business sense in the long-term normal running of a practice, it becomes much more problematic in the final year/s of practice ownership, for several reasons:
1. It can reduce the valuation of your practice
What someone is willing to pay for a practice is strongly influenced by the profit of the practice. Ideally, when you are selling a practice you want to show a buyer a picture of the practice that is as profitable as possible. If, instead, the profit is deflated because of excessive stock purchasing in the final year, it can decrease the value of the practice. When analysing the business for purchase, most buyers will have trouble adding the value of the excess stock that you bought on sale to the profit of the business.
2. It can jeopardise the sale entirely
When a buyer purchases a practice with excessive stock, the seller often wants the buyer to compensate them for this perceived excess value. Most buyers will get annoyed at this presumption and, oftentimes, flatly refuse.
a. Sometimes the stock will be incompatible with the buyer. A buyer doesn’t want to be asked to pay extra for a cupboard full of jumbo-sized gloves that don’t fit them, a composite brand or implant componentry that they have previously had a bad experience using, or consumables for clinical work that they just don’t do.
b. Even if they will eventually use the stock, the buyers are often already putting themselves under significant financial pressure to buy the practice on its own. The last thing a buyer wants at that point is to be hit with a bill for buying endo files and cotton balls that will take a year to use up.
It would be much less stressful for the buyer to borrow less to buy the practice and buy stock as needed through the normal cash flow of the practice.
The "Goldilocks" level of stock in your final years
Buying excess stock can make good business sense in the medium term but, in the final year or two, it can be counterproductive to achieving a good result in the sale of your practice.
On the flip side, make sure that you don’t run the stock down to the point where you are worried about running out in your final year/s. It would be a good idea to ignore bulk sales and limited-time offers for stock you don’t need.
Keeping stock levels for about a month in advance is just about right.