Inventory management affects practice value, and the impact of inventory on practice value can be very large.
How does inventory management affect practice value? Inventory and related costs (Costs of Professional Services - COPS - see earlier discussion) represent the second highest cost area for most practices. Typcially, this category of costs represents on a percent of revenue basis, between 15% and 30% of revenue in a practice. Most practices are valued in some manner as a multiple of earnings or profit. Therefore, for every $1 million in revenue for a practice, the difference in profitability for a practice whose COPS is 15% compared to 30% of revenue is $150,000.
If we assume that practices are currently valued at approximately 5 to 7 times earnings (this is variable and changing) then the practice with 15% COPS as a percent of revenue is worth between $750,000 and $1,050,000 more than the practice whose COPS is 30% as a percent of revenue, assuming all other factors are the same.
Yes, inventory management has a huge impact on practice value! Ensure that you invest the necessary attention to managing your inventory, as your practice value will be impacted by it.
