It is usual to see ads of pharmacies on sale and people looking for pharmacies to buy.

Various theories explain why this is happening, including thoughts on the impact of the Pharmacy and Poisons Board (PPB) raids on unregistered pharmacies.

The retail (community) pharmaceutical industry in Kenya is also highly competitive, with over 7,000 pharmacies registered by the Pharmacy and Poisons Board (PPB) in 2024, which may be a reason for some chemists shutting down if they are unable to withstand the competition for the Kenyan pharmaceutical market estimated to be worth USD 525.40 million.

Regardless of the side of the equation you are on in a deal involving buying or selling an existing pharmacy, both parties must agree on how to evaluate the value of the inventory.

What are the inventory valuation methods available?

The usual methods of valuing inventory include FIFO (First In, First Out), LIFO (Last In, First Out), and WAC (Weighted Average Cost).

The cause of the varying methods is that, for example, one might have bought the goods at the pharmacy at varying price points even for a single SKU (Stock Keeping Unit) over time, creating the dilemma of applying current market prices or focusing on the pricing applicable at the time of purchase.

FIFO (First In, First Out) Inventory Valuation Method

This inventory valuation method assumes that the goods bought earlier sell before those received later.

The system would allocate the remaining inventory to the earliest market rates, even to specific SKUs (Stock Keeping Units) purchased earlier. 

The challenge with this method occurs when dealing with highly erratic market fluctuations in the pricing of specific products, seen when an item is out of stock from suppliers or when there is an increase in pricing due to more demand when a product demand increases due to seasonal issues.

LIFO (Last In, First Out) Inventory Valuation Method

This method of inventory valuation assumes later inventory sells before the former.

For example, if you have 300 units of paracetamol, which you bought at a price of Kshs 20 for the first 50, then at Ksh 25 for the next 120, and Khs 30 for the last 30, if you sell 150 units, your inventory value at the end of the inventory period stands at Kshs 20*50.

If you were using the FIFO method discussed earlier, the inventory value at the end of the accounting period would be Kshs 30*30 plus Kshs 25*20.

Weighted Average Cost (WAC) Inventory Valuation Method

You can consider the Weighted Average Cost (WAC) method of inventory valuation as a balance between the FIFO (First In, First Out) and LIFO (Last In, First Out) methods of evaluating stock.

Here, you first calculate the COGS (Cost of Goods Sold) by multiplying each inventory batch with the individual purchase cost and adding them together before dividing this figure by the number of SKUs (Stock Keeping Units). 

In this method, you can predetermine periods for calculating COGS (Cost of Goods Sold) or calculate every time a new batch of inventory gets introduced into the system.