How to calculate your inventory worth: Must-know tips for med spas

When calculating your inventory worth, you can choose the manual or digital route. Either use a handful of tried-and-tested manual protocols to optimize your inventory flow or discover why integrated practice management software may just be the better solution for your med spa.

Which Inventory Valuation Methods Work Best for Med Spas

To calculate your inventory's worth, you must first determine the value of individual retail and treatment products. While there are several approaches, they vary in accuracy, simplicity, and legality. Some suit the medical aesthetics industry better than others:

1. First-In, First-Out (FIFO)

This method assumes the first items you buy are the first items you sell, as if you're packing a shelf from the back and scooting older products forward. The items "first in" to inventory are the “first out” to patients.

• How FIFO works: Say you buy 10 retinol serums in January for $20 each, then 10 more in February for $22 each. If you sell 15 serums in March, FIFO assumes you sold the 10 older $20 serums and five newer ones.
• How it suits med spas: Med spas and FIFO are an excellent match. FIFO is a simple, realistic method that reflects med spa stock's usual flow because, as you know, many skincare products expire quickly.

2. Last-In, First-Out (LIFO)

LIFO, or “last in, first out,” assumes the most recent stock you've purchased is the first stock you'll sell. It's not a good choice for med spas because you gradually accumulate older stock that could easily expire. Also, LIFO is not permitted under the International Financial Reporting Standards (IFRS) because it doesn't reflect how most businesses actually sell products.

3. Weighted Average Method

The weighted average method finds the median cost of differently priced product batches, taking into account how many units are left from each batch.

• How the weighted average method works: First, calculate how much each batch is worth. January's batch of 10 $20 serums is worth $200, and February's batch of 10 $22 serums is worth $220. Combine them to get a total batch worth of $420 (200+220=420). Next, count the total number of retinol serums you have (10+10=20). Then, to find the weighted average cost per serum, divide your total batch cost by your total serum count to arrive at $21 per serum (420/20=21). Now, when you sell five bottles of retinol, you can assume that each costs you $21.
• How it suits med spas: This method works well for med spas that often buy bulk products with varying market values, as the weighted average method helps smooth out cost fluctuations.

4. Lower Cost of Market

With “lower of cost or market” (LCM), you value your inventory at either its original cost or its current market value, whichever is lower. "Market value" generally means what it would cost to replace your products in today's new context.

• How weighted average works: Say a batch of 10 retinol serums originally cost you $20 per bottle, but due to shifting trends, their market value drops to $15 per bottle. Using LCM, that batch's worth would go from $200 (10x20=200) to $150 (10x15=150) to reflect its current market value.
• How it suits med spas: If you run a med spa, this method could be your best option. The more conservative and realistic LCM method takes expiration dates, changing consumer preferences, and damages into account, all of which affect med spas significantly.

How to Calculate Your Med Spa's Inventory Worth Overall

Once you've chosen a method, you can calculate your inventory's worth:

1. Count Your Stock

Determine exactly what's in your inventory. You can physically count each item or use inventory tracking technology to save time.

2. Determine Each Item's Value Using Your Preferred Method

Apply your chosen inventory valuation method to work out each individual item's value.

3. Multiply Each Item's Cost by How Many You Have

Once you've valuated every unique item, multiply that number value by the quantity you have in your inventory.

4. Add All the Item Values Together

Finally, add up the total value of all the individual items in your inventory to arrive at your overall inventory worth.

Why Med Spa Inventory Valuation Matters

Accurate inventory valuation is essential for your med spa's financial health and operational efficiency. If you know how much your inventory is worth, you can:

1. Calculate Your Med Spa's Cost of Goods Sold (COGS)

Calculating your cost of goods sold (COGS) lets you understand where and how your business is making money. COGS covers the cost of everything you use to provide your services and everything you sell to patients retail. If you properly track your inventory and apply your chosen valuation method consistently, you can find your COGS, evaluate your med spa's profit margins, and make business decisions based on what you learned.

2. Keep Accurate Financial Statements

You need a demonstrable med spa inventory valuation to create financial documents like balance sheets and income statements. These details include your med spa's financial position and performance, which is essential for attracting investors, securing loans, and making informed business decisions.

3. Ensure You're Tax-Compliant

Proper med spa inventory valuation is essential for complying with tax regulations. The Internal Revenue Service (IRS) requires businesses to value their inventory for tax purposes, and using a consistent and accepted valuation method can help you avoid penalties and ensure compliance.

4. Get Proper Insurance Coverage

You need detailed, up-to-date, precise inventory valuation to properly submit insurance claims. If your stock gets damaged or stolen, your insurance company needs a fact-based estimate of your lost inventory's value so they can compensate you accordingly.

How Technology Optimizes Med Spa Inventory Management

The right software can save businesses valuable time, effort, and money. For med spas, all-in-one electronic medical record (EMR) platforms are ideal because they automate, simplify, and improve the inventory management process alongside scheduling, medical records, and more. With a comprehensive EMR, you can:

1. Remotely Track Your Inventory Flow and Automate Stock Control

EMR software lets you easily check stock levels and expiration dates for products across multiple locations, including retail items, professional-use products applied during treatments, and single-use supplies like injectables and disposables. Low-stock warnings and automated reorder points also help reduce human error and make sure you're always ready to help your patients.

2. Simplify Tracking and Point-of-Sale Integration

A point-of-sale (POS) system processes your med spa's day-to-day transactions. If you link both your POS system and a barcode scanner to your inventory using EMR, the software will conveniently update your inventory as you ring up items.

EMRs specifically designed for the medical aesthetics industry can link specific products to individual treatments on the system. When a staff member rings up a treatment, the system already knows which disposables and professional-use products the aesthetician will use. That way, even your non-retail items are tracked automatically.

3. Make Well-Informed Decisions Using Data-Driven Insights

You can gain valuable insight into which products and services your patients love through an EMR system's reporting and analytics features. They track how quickly each product sells, identify slow-moving items that are tying up capital, and optimize your stock levels so you waste less and make more. With this knowledge, you can make more informed decisions about purchasing, pricing, and marketing, boosting your med spa's efficiency and profitability.

4. Streamline Your Med Spa's Cost of Goods Sold (COGS) Tracking

To ensure your business earns a consistent profit, you need to calculate your COGS regularly and accurately. Manually, this can pose a challenge, but a specialized EMR that diligently tracks and records your inventory flow already has all the data it needs to calculate COGS for you and compare them across facilities.

Digitize, Simplify, and Automate Your Med Spa With PatientNow

You need an EMR platform that can do it all, and the team at PatientNow has a solution that's custom-built for the medical aesthetics industry. Our software suite combines med spa inventory management, scheduling, patient data storage, engagement, and marketing functionalities into one integrated, automated, user-friendly system.

We're ready to optimize your practice, so book a free demo with us today and get started.