Simmons & Associates MidSouth – Wilson McManus II, DVM, CVPM & Kris Smith, CVPM |
Do you feel you have a successful, busy veterinary practice, but you consistently end up with little or no profit at the end of each month? Have you recently had a practice valuation and were shocked that you really don’t have anything to sell? You are not alone as many practices face these issues. This article will give you practical applications to increase your profit and the value of your practice. From years of successful practice management experience by assisting and coaching our clients to better control their drugs and supply expenses we have gleaned these suggestions for improvement. These are not intended to be a one size fits all, but rather general principles to help you develop your own systems to manage your costs and increase your hospital’s overall profit.
Traditionally small animal practices have a total Cost of Product (COPS)/Goods Sold (COGS) or simply inventory and supplies in the 20-22% range of total practice revenue. Large and mixed animal practices tend to run higher. If you find your COGS expenses are running higher than 20-22%, ask yourself, are you artificially inflating your inventory costs by doing the deals and purchasing large quantities of products on a “buy-in” or “drug deal” to receive delayed billing, bundles of cash back, or even better, a free Yeti cooler. Practice owners and managers know they will eventually use the product so why not get a discount or better yet, something free. All inducements are designed to have you move their product onto your shelves. If it is on your shelf, it is off of theirs. Our recommendation is to “Just Say No!” to “buy-in” deals, i.e. “drug deals” and state that no matter how good the deal, you only buy what you can use in the next week. These too good to be true deals sound so sweet, but they are really bitter to your profits. They can adversely affect your ability to manage for profit and ultimately the life blood of every business…your weekly and monthly cash flow.
Inventory management is so much easier to manage in today’s times. With next day or two-day delivery available, we recommend you only order the amount of inventory and products that you would reasonably expect to use in the next seven to ten days. If you order weekly, use last week’s sales (previous seven days of gross income) as a guide and set a budget of no more than 10% or less of the previous week’s gross revenue/sales for inventory replenishment. Utilizing the inventory module in your software is the best way to quickly determine the inventory products you need to order for the coming week. By establishing your reorder points, or the minimum number of an item(s) you need to maintain in the hospital on a weekly basis, you will quickly gain control of your practices’ inventory. This process takes some time and effort to get started but it is well worth the effort. If you can’t do it all at once start with the expensive items such as heartworm prevention, flea/tick preventatives, and name brand arthritis medications. Then move onto other categories each week as you develop your reorder points. Evaluate your practice management software transaction details report for the previous month to find out how many units you sold of each brand/size in the previous month? Divide that number by three. This number becomes your baseline reorder point – ideally one week plus a small cushion. On your weekly inventory ordering day, your inventory manager can print your inventory re-order report and verify it against what is on the shelf. If you are below your baseline reorder point, order up to that number. If you are over that point, you will not need to order product this week.
When you do the “drug deals”, and order large quantities of products, the situation may arise that the product mysteriously “grows legs and walks off”. The industry term for this is inventory shrinkage. Many owners think this is not possible and it does not happen in their practices, but it does happen more often than they think. Quite often the perception is that there is so much product there, that no one will miss one or two packs of flea/tick control or heart worm preventative, etc., when those packs can easily represent a cost of $50-$100, not to mention the loss of profit on a future sale to a client. By ordering only the inventory you need for the week, you can monitor your inventory counts more effectively, especially on your higher cost items because it is more obvious when shrinkage or theft occurs.
Inventory tracking by regular counts of the inventory should take place at least quarterly, with corresponding updates or adjustments to correct balances in the inventory module of your practice management software and financial statements. We recommend on expensive medications to count them weekly to send the signal that these high cost medications are being monitored regularly
An effective way to double check if you’re controlling your inventory costs is to calculate your “inventory turns” per month. To calculate this number, divide your cost of sales (COGS) from the previous year by your total year-end inventory figure from your balance sheet. By comparing your current inventory turns to your end of year number, you can track your continued improvement. We have found that well-managed practices will have inventory turns of one time per month or twelve times or greater inventory turns annually.
Controlling expenses related to inventory is only a part of the solution. Adequate markups and adjustments for inflationary costs on a regular basis are equally and extremely important. Practices should also evaluate the pricing on pharmacy & outside laboratory services to insure margins are enough to cover costs and compensate the veterinarian for the sale. We often see, especially with practices in rural areas, inadequate markups. This is tied to the idea of trying to compete with the internet, or with the local feed store. By lowering the markup on products, inventory costs (COGS) as a percentage of revenue often goes well above 30% of revenue. Product sales may be healthy, but if the practice is stocking and selling the products at too low of a margin, it can adversely affect the practice’s profit and value. The end results are an increase in practice gross revenue but a decrease in profit and subsequent practice value. Remember you can’t compete with mass merchandiser on prices. The best thing is to offer a competitive pricing, convenience, manufacturer’s warranties, rebates and excellent service to maintain the practice’s market share.
One of the best ways to monitor the practice’s overall revenue and expenses, and we highly recommend the implementation and use of the AAHA/VMG chart of accounts for recording revenues, drugs & supplies and other expenses. It is available at no charge from www.aahanet.org.
We know it is difficult to wear so many hats in a veterinary practice such as Chief of Staff, Practice Manager, Human Resource Manager and still practice veterinary medicine. We want to give you the tools to succeed and grow your practice. At Simmons & Associates can help you to identify and make the changes necessary to make your practice more profitable and valuable over time. Contact the Simmons representative in your area (www.simmonsinc.com) for more information on a practice valuation for management, especially if you plan on exiting your practice in the foreseeable future.