This article was co-written by Sherry Everhart, CVT, CMA.
The costs of providing medical services have dramatically increased during the past several years, with well-managed veterinary practices seeing these expenses comprise 26% or less of their revenues. While, historically, the costs of drugs and medical supplies commonly fell in the range of 18–21% of revenues, it is increasingly common today to observe these expenses approaching 30% of revenues or higher. This can have a significant, negative impact on a practice’s financial health and overall veterinary practice profitability. Here are some suggestions that might help.
Mastering Inventory Turnover for Veterinary Practices
One ongoing pharmacy struggle is deciding the appropriate quantities of each drug to have on hand. Holding too much inventory incurs added costs in veterinary pharmacy management, including waste, obsolescence, and potential theft. Plus, it ties up a significant amount of capital that could otherwise be invested to generate income. These “holding” costs can easily add up to an additional 8–20% of a product’s unit cost.
Conversely, there are costs to holding little inventory. This can include staff time to place frequent re-orders and the time to process and deal with multiple incoming shipments. There is also the added risk of lost sales or dissatisfied clients when the right medications are not available to treat their pets. These labor investments can add an additional 15–20% of a product’s unit cost.
Calculating vet practice inventory turnover ratios can be helpful in assessing the efficiency of a practice’s inventory system and whether or not the practice has an appropriate level of inventory on the shelves. The target inventory turnover ratio for most products in a veterinary practice is around 8 to 12 times. This means that the average inventory does not sit on the shelf for more than 30–45 days before being sold.
To calculate a product’s inventory turnover ratio, divide the costs of a product sold over a particular period by the average value (in $) of the inventory that was on hand for that same period. A product’s average inventory on hand is calculated by averaging the value of the inventory sitting on the shelf at the beginning and end of the period in question.
Generally speaking, a lower inventory turnover ratio can indicate excess inventory or weak sales in a product. A higher ratio may indicate strong sales but could also mean too little inventory in stock. However, the ease in getting the product ordered and received in a timely manner should be a consideration when evaluating this measure.
Are you a veterinarian looking to improve your practice’s financial health? Download our free in-depth guide to inventory management!
Time Management
Another element to controlling inventory costs is minimizing the amount of time required in managing a practice’s inventory. Applying ABC management principles can help prioritize the effort applied to managing the inventory. This takes into account a product’s contribution to the practice’s overall performance.
The practice’s ‘A’ inventory items are the most frequently ordered, heavily used and/or have high costs. While they are typically responsible for about 70–80% of a practice’s product sales, they are often only about 20–30% of the practice’s total inventory items. These items, such as your parasiticides and pet foods, should be monitored with high frequency and have defined re-order points to ensure stock is always available.
“C” inventory items are used infrequently and/or are the low-cost items that contribute a minimal amount to the practice’s overall revenues. These items require little monitoring and have re-order points that are set at low levels or possibly on an as-needed basis. Checking expiration dates is a key element to monitoring them.
The “B” items are the ones that do not fit in A or C. They may not be consumed as quickly as the “A” items but are still essential products that are needed in sufficient quantities for optimum patient service. These items may require only monthly monitoring with slightly higher re-order points to accommodate a lower level of oversight.
Strategic Purchasing: Proven Methods to Lower Your Veterinary Pharmacy Expenses
In addition to improved inventory management, several other measures can be taken to reduce inventory costs on a per unit basis:
- Purchasing groups can help practices that do not purchase significant levels of inventory required to receive optimum pricing. It is important to find the right group(s) and to consider the projected savings relative to any applicable membership fees.
- Bulk buying can be advantageous when it involves a practice’s “A” inventory items. However, advantages gained through the special pricing need to be greater than the risks associated with tying up cash reserves, storing the excess inventory, increased opportunity for theft, waste or obsolescence, and the greater chance of product expiration.
- A central purchasing service, such as Vetcove, allows a practice to compare pricing and place orders from multiple veterinary vendors using one centralized platform. The concept is similar to Amazon but exclusive to veterinary vendors.
Fine-Tuning Your Fees: Using Income-to-Expense Ratios to Improve Profit Margins
Tracking income to expense ratios can help ensure that the practice is receiving an adequate return for the costs that were expended in providing the service or product.
These ratios are particularly important for product categories with low profit margins such as prescription diets and flea/heartworm medications. It is also good for services that require significant investments, such as imaging or in-house lab equipment.
To calculate an income to expense ratio, simply divide a service or product category’s income by its respective operational costs. The lower the income to expense ratio, the lower the profits.
A low ratio can indicate a problem with the pricing. However, it can also mean that the product is being used without any revenues associated with it, e.g. missed charges, discounts or theft. An unexpectedly low ratio can be a symptom of problems with how the inventory is being managed or that theft is occurring.
Tracking Hidden Expenses: Implementing a Practice Price Index (PPI) for Internal Supplies
Also to be considered are the more subtle increases in cost of pill vials, syringes, applicators, reconstituting fluids, etc. How does a practice account for the increase in these foundational pharmacy costs?
One relatively quick (and simple once it is set up) process for practices is to create a Practice price index (PPI). The PPI captures changes to the pricing of the disposable/consumable items used in the practice.
Start with a spreadsheet that contains a list of the top 50 items that are used internally. In the next column, record the amount typically ordered, followed by the cost as if that amount was ordered today with a total at the bottom. At least annually or semi-annually, price check these 50 items. Compare the new total to the previous check point. If there is an increase, calculate the percent increase over the prior period. Apply this percent increase to all applicable services, treatments and products. Depending on your practice management software, you may be able to skip manual monitoring and allow for automated fee adjustments through your existing platform. Either way, tracking the PPI will help keep the practice’s fees current with these rising internal costs.
Well balanced sales and effective inventory management are essential to a practice’s financial health. An efficient inventory management system ensures that the practice has the right products on hand to provide the highest level of patient care with the practice receiving a fair return on that investment.
Learn more about this and other Essential KPIs to Track in 2025 during our Hour with the Experts webinar Tuesday, January 14 at 7 p.m. EST.
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David McCormick and Sherry Everhart are veterinary practice appraisers and practice management consultants at Simmons & Associates. They can be reached at 888.746.3717 and by email at DMcCormick@TMcCG.com and SEverhart@TMcCG.com.
