Inventory management and practice profitability go hand in hand. Here are some essentials to manage the process.
Managing inventory in a veterinary practice is a tough job—one that requires someone who is fiscally responsible, organized, focused and detail oriented, says Camala Bailey, CPA, CVA. When well managed, these four aspects of inventory management can improve profitability in your hospital, she advises.
1. Know how much you need. Do an inventory count. “Yes, this takes some time,” Bailey says, “but once you’ve done it, it’s a breeze to keep it up.” Be consistent when conducting inventory counts, she advises. If one person counts a drug by tablets (versus bottles), everyone should be counting the drug by tablets—or your count will be way off.
Here are some other ways to determine your ideal inventory:
- Match your inventory to your top 20 clients. “Keep them happy, because they’re your VIPs,” Bailey advises.
- Eliminate duplicate drugs. You don’t need to have four brands of the same ointment or eyedrops. Ask your veterinarians to agree on preferred brands, and carry as few as possible.
- Review your invoices. Distributors should charge sales tax when you purchase items that will be used in your clinic, but not for items you resell. Check your invoices to make sure taxes aren’t being paid twice—once by your practice when you purchase the item and once by your clients when they pay sales tax. “The only winner in this scenario is the state,” Bailey says.
- Use your practice information management software (PIMS). When inventory is input accurately, your PIMS can help you track product usage and expiration dates, determine reorder points, create purchase orders, and more. “I’d love to see everybody review inventory reports monthly at a minimum to look for outliers,” Bailey says.
2. Use a formula to price products. Pricing is typically based on cost plus a markup. Some typical markups for common products:
- Prescription drugs: 20% to 25%, plus a prescription fee
- Parasite preventives: 75% to 100%
- Pet food: 40% to 45%
- Over-the-counter items: 85% to 100%
Pricing can also be determined by the formula F + V + P = S, where F is the fixed cost (overhead), V is the variable cost (purchase price, time spent purchasing the item and tracking it in your software), P is your desired profit, and S is your sales price. So, for a product whose fixed cost is $2, variable cost is $10, and desired profit is $10, the formula would yield a sales price of $22 ($2 + $10 + $10).
3. Engage the whole team. “Inventory shouldn’t be left up to the inventory manager, practice manager or owner alone,” Bailey says. “The whole team should be involved.” Touch on the topic at every staff meeting, covering how to handle supplies and equipment to prevent spoilage and breakage, and how to be economical to prevent overuse. Sharing some financial information about your practice inventory may help your team understand how inventory control relates to practice profitability and the ability to pay their salaries and benefits.
Once the team is on board with their part of the process, set inventory goals. “Look for the low-hanging fruit first,” Bailey suggests. “Set a goal, achieve it, and give a reward of some kind.”
4. Perform checks and balances. Inventory controls should be just as strong as cash controls, Bailey says. “Not only should you cross-train at the inventory manager level, but you should also really cross-train throughout your practice,” she advises. That means other people in the practice should be trained to serve as backup. For example, purchasing and receiving should be handled by two different people. “It’s also important that the inventory manager take a break from the role periodically so that the books can be reviewed and inventory can be checked to make sure everything is in good order and that all procedures are in place,” she says.
Bailey also recommends performing random inventory counts and letting everyone in the practice know that you’re doing it. “Hopefully that will help reduce theft or thoughts of theft,” she says.