Inventory management isn’t glamorous. Many veterinary practices see it as a necessary evil and dedicate as little time and attention to it as possible. Despite the bad rap, a well-managed inventory can quietly support a hospital’s success. On the other hand, a poorly managed or neglected inventory can convey a wildly inaccurate financial picture, especially if employee misconduct is involved.
No practice manager or owner wants to think that theft or product diversion happens at their hospital. Unfortunately, such situations do occur and will weaken a business financially. Regular inventory counts and proper checks and balances can identify fishy conditions, such as hundreds or thousands of dollars’ worth of heartworm prevention going missing.
Even if you have perfectly honest team members, accounting for your inventory still matters. The products you purchase, how much they cost, how quickly they sell and the revenue they generate directly impact your bottom line. To understand your finances and keep accurate books, you should commit to routine counts and keep them updated in your practice management software.
Easier said than done, right? Using the appropriate tools, you can get your inventory under control and keep it that way.
How Inventory Affects Profits
Medications, preventives, vaccines, surgical supplies and other consumables comprise a significant portion of a veterinary practice’s expenses. The cost of goods sold has an inverse relationship with practice profitability. The higher your COGS, the lower your profit margin.
Goods and supplies logged into your inventory and ready to be used or sold are considered a balance sheet asset. As you sell them, their value moves from inventory to COGS. The cost of goods sold can get thrown off when your inventory isn’t updated regularly or when you don’t price products and related services appropriately. In that case, you’ll be left with inaccurate — and sometimes negative — costs on your profit and loss statement.
Certified practice manager Brenda Tassava Medina, the director of growth and innovation at Encore Veterinary Group, understands the importance of accurate COGS.
“When you count the inventory and report it on your books, now you’re looking at ‘What goods did I actually purchase and use in this specific period?’ and not ‘What did I purchase total?’ It allows you to say, ‘I have a very realistic perception of what I spent and how that coincides with how much I made,” she said.
VetBooks’ director of client success, Amber Barrett, added: “If you do all the things required for inventory, you can see what it costs to make revenue each month and make financial decisions based on that. Our clients want to know, ‘How am I doing? How can I do better?’ And the only way to answer that on top of capturing their revenue and other expenses is making sure their costs are accurate.”
Best Practices
Following established best practices can make inventory management less painful. First, all veterinary practices should conduct frequent counts to catch and correct discrepancies as they occur. Although most PIMS systems can track inventory, they aren’t perfect. Quarterly hard counts of everything and monthly spot checks of high-value or fast-moving items, like preventives and vaccines, are ideal.
If you don’t check your shelves regularly, you might overlook theft, expired products and errors. Hard counts help you refine ordering processes and prevent over- or understocking, which can harm profitability or patient care.
Tassava Medina recalled one hospital’s shocking finding.
“After the practice started counting monthly, they discovered that $4,000 worth of heartworm product was missing,” she said. “It had been purchased that month but suddenly was not there, and that led to discovering a team member who was selling product online. If they hadn’t been counting, they would not have been able to find and stop the issue.”
Checks and balances provide additional protection. Having one person manage the inventory is tempting but can lead to mistakes or fraud. Therefore, assign someone — ideally the inventory manager — to place orders, another to receive and unpack them, and a third to update quantities in the computer system. After that, the practice manager or bookkeeper can use supplier invoices to code and categorize expenses.
Furthermore, the AAHA/VMG Chart of Accounts uses coding and categorization to help bookkeepers and accountants understand where money enters and leaves a practice. If you need assistance with inventory protocols or the Chart of Accounts, consider hiring a consultant or bookkeeping service to code and track everything.
Data analytics, particularly those that benchmark practices in your area, can help you adjust prices. If you see profit and loss discrepancies that your prices don’t explain, dig deeper to determine the root cause. Is it a compliance, communication or staff training issue?
Inventory Day
Frequent hard counts can be easier said than done. You must close the clinic to ensure an accurate inventory, and your team members must be willing to help. Try recruiting them by offering a few hours of overtime pay and dinner.
Tassava Medina recommends spreading the work across multiple employees using printed inventory sheets organized by product category, not alphabetically or by department.
“It’s a divide-and-conquer type of situation,” she said. “If you’ve got an inventory manager who thinks they are solely responsible for the count, then it’s going to take hours for that individual to do it properly. You need to divide those worksheets and have the entire team do it.”
The ABC technique can help you determine the products to count monthly or quarterly. For example, divide your services into profit categories “A” (high), “B” (medium) and “C” (low). Then, each month, count the “A” products your practice uses most frequently.
Inventory software that integrates with your PIMS can simplify the process. Also, mobile applications that count pills instantly from a photo can save significant time and frustration.
For more help, Tassava Medina recommends the inventory chapter in Heather Prendergast’s book Practice Management for the Veterinary Team: Front Office, Operations and Development.
Keeping your inventory in check is like placing the final puzzle piece. When everything fits, the picture becomes clear-cut, and your practice thrives.
ONE MORE TIP
Expired products must be dealt with properly so they don’t eat into practice revenue. Many manufacturers and distributors will allow you to return a product if you send it back within 60 days of expiration. During inventory counts, ask team members to note expiration dates on their worksheets so that you can catch anything your computer system missed.