Setting Up a Drug Revolving Fund

The steps

Setting up a drug revolving fund means getting people, a stock list, a budget and a bank account ready before the first sale. The steps in the curriculum are:

1. Discuss the idea with the district or village health committee, and explain what a revolving fund could do.
2. List the essential medicines the health unit needs.
3. Decide the ordering interval.
4. Quantify the amount of each medicine needed in one ordering interval.
5. Cost the medicines to be ordered.
6. Identify the source of the seed capital for the first stock.
7. Explain the levels of cost recovery to the community, with their advantages and disadvantages, and let the community choose.
8. Open an account book and a separate bank account for the fund.
9. Nominate the signatories to the account.

The list of essential medicines

Start from the essential medicines list for the level of health care, and choose the medicines for the illnesses that are most common in the area. The list should be short. Stocking rarely used medicines ties money up and risks expiry. See the lesson on the essential medicines list.

The ordering interval

The ordering interval is the time between one order and the next, for example every month or every three months.

The right interval balances these. It depends on how far the supplier is, how reliable transport is, and how much money is available.

Quantifying the order

You need to know how much of each medicine to order. The quantity is based on past use.

Average monthly consumption (AMC) is the average amount of the medicine used each month. Find it from the issue records or sales records of the last few months. Do not count months when the medicine had run out, since use would have been higher.

order quantity = AMC × (ordering interval + lead time + safety stock)
                 − stock on hand − stock already on order

All three time periods are in months.

• The ordering interval is how long the order must last.
• The lead time is how long the supplier takes to deliver.
• The safety stock is an extra cushion for delays or a sudden rise in use.

Worked example: the first order and seed capital

A health unit will order every 3 months. The lead time is 1 month and the safety stock is 1 month. This is the first order, so there is no stock on hand. Prices are made up.

Months of cover = 3 + 1 + 1 = 5

The cost of the first order is the seed capital needed for these three medicines: ₦74 500. A real list will have many more items, and the fund must also keep enough money for running costs.

Worked example: a later order

Three months later the unit has 900 paracetamol tablets left. How many should it order?

• Order = 600 × 5 − 900 = 3 000 − 900 = 2 100 tablets
• Cost = 2 100 × ₦4 = ₦8 400

If 500 tablets are already on order and not yet delivered:

• Order = 3 000 − 900 − 500 = 1 600 tablets

Always use current unit costs, and check the order against the money available.

Costing the order

cost of an item = quantity ordered × unit cost
cost of the order = total of all the items

Add the cost of transport and handling. Use the current price, not an old one.

Seed capital

Seed capital is the money used to buy the first stock. It may come from:

• the community, for example contributions or a village fund;
• the government, such as a local or state grant;
• donors or partner programmes;
• a loan, which has to be repaid.

If the seed capital is underestimated, the fund will start with too few medicines and will quickly run into trouble.

Levels of cost recovery

The community chooses how much of the cost the fund will try to get back through prices. This is the cost-recovery level.

cost recovery (%) = revenue ÷ cost × 100

Worked example

Each month the fund's medicines cost ₦100 000 to replace and its running costs are ₦20 000.

If actual sales are ₦90 000:

• Recovery of the medicine cost = 90 000 ÷ 100 000 × 100 = 90%
• Recovery of all costs = 90 000 ÷ 120 000 × 100 = 75%
• Shortfall on medicines = 100 000 − 90 000 = ₦10 000

Explain to the community what each level means for prices and for how long the fund can last. A higher level means higher prices but a safer fund, and the community decides.

The account book and bank account

• Open a separate account book (the cash book) that records only the fund's money.
• Open a separate bank account in the fund's name. The fund's money must never be mixed with personal money or with other accounts.
• Nominate signatories, at least two people, who must both sign to withdraw money. This protects the fund against misuse.
• Bank statements are checked against the account book each month.

The practical steps for opening an account, and how the records are kept, are in the next lesson.