The mission of the HSAH Veterinary Solutions Workshops was to elicit expert advice and actionable business solutions to increase the practice success of the veterinary customers we serve while reinforcing the veterinarian to the pet owner as the best source of healthcare andproduct choices for longer healthier lives of the pet family member.
Each month we discuss the insightful viewpoints of four of the most respected and well-known financial experts in the veterinary business today. These insights were a result of a day-long workshop conducted by Henry Schein Animal Health, Elanco, Ceva, Merial and Zoetis.
- Dr. Karen E. Felsted, CPA, MS, DVM, CVPM, CVA, PantheraT Veterinary Management Consulting
- Gary I. Glassman, CPA, Burzenski & Company, P.C.
- Dr. Marsha L. Heinke, DVM, EA, CPA, CVPM Marsha L. Heinke, CPA, Inc.
- Fritz Wood, CPA, CFP, HF Wood Consulting
Taking Stock of Your Practice's Most Valuable Assets - 11th in Series
September 6, 2016
Editor’s note: This is the 11th in a series of monthly articles that discusses the insightful viewpoints of four of the most respected and well-known financial experts in the veterinary business today, who came together in late 2014 and 2015 at the invitation of Henry Schein Animal Health, Ceva, Elanco, Merck, Merial, Purina, and Virbac to share their expertise and informed opinions in the areas of pharmacy, nutrition and data.
They are: Dr. Karen E. Felsted, CPA, MS, DVM, CVPM, CVA of PantheraT Veterinary Management Consulting; Gary I. Glassman, CPA of Burzenski & Company, P.C.; Dr. Marsha L. Heinke, DVM, EA, CPA, CVPM of Marsha L. Heinke, CPA, Inc.; and Fritz Wood, CPA, CFP, HF of Wood Consulting. The mission of the “Veterinary Pharmacy Diets and Data Solutions Workshop” is bringing expert advice and actionable business solutions to increase the practice success of the veterinary customers we serve while reinforcing the veterinarian to the pet owner as the best source of healthcare and product choices for longer healthier lives of the pet family member. Be sure to visit henryscheinvet.com/betterbusiness to watch live video clips excerpted from the workshop that accompany each monthly article.
Best practices in managing your pharmacy inventory
Just because you occasionally hand over a prescription for heartworm medication to your client doesn’t mean you have to hand over your business to a big box retailer or internet competitor. And yes, you can compete with them on price for pharmacy items like heartworm and flea preventatives if you’re willing to exchange higher margins for potentially more lucrative higher volume sales.
It is possible to think like your behemoth competitors while maintaining the professionalism your clients have trusted all these years. Consider: Big box retailers have long known that customers waiting for an in-store pharmacy to fill their prescription are likely to browse and buy other items. Take a look at the inventory closest to the pharmacy windows. What’s near your practice’s pharmacy window? As we’ve said before, many of your clients won’t even think to buy routine preventative medications and diets from you if they don’t make the visible connection that you actually have them on-hand. Place the product in your front reception area and/or your exam rooms and make it accessible. Ensure your inventory levels are maintained based on historical purchases.
Remember too that your online store will allow you to increase your product selection in a nearly unlimited way, especially if your store is set up to ship orders direct from your distributor. All the better if you offer home delivery for items like heartworm and flea medications. Your online pharmacy allows you to carry the veritable universe of pet pharmacy products while keeping a smaller onsite physical inventory of the most popular or best-selling products.
Your hospital pharmacy is likely to have a large number of items big and small, inexpensive and costly. It’s critical you perform regular inventory counts to safeguard these assets and ensure a healthy cash flow. Most clinics are turning their drugs and related inventory only four times a year, whereas hospitals with the most efficient management systems can expect as high as a ten-times turn.
The average clinic in the U.S. has approximately $80,000 of excess inventory. While the current supply chain allows nearly every clinic in the country to achieve a streamlined physical inventory, many practices have 90 days of inventory sitting on the shelf, indicating opportunity for significant internal process improvement.
Another fact you may not know: Pharmacy consumables such as syringes and gauze pads can account for almost 50% of what you have sitting on your shelves. Be mindful that little things can add up to large stockpiles, prone to waste and excessive expense.
Keep close tabs on trends in your in-house vs. home delivered pharmacy sales. You may need to adjust inventory levels if your webstore sales begin to increase significantly. Home delivery services may tighten your practice margins on some products; in many cases, however, the increase in sales volume will more than make up for lower margins. The automated reorder options of home delivery along with competitive pricing adds the client convenience and value needed to increase loyalty and sales volume.
Advice on managing your nutrition inventory
We’ve written extensively over the past year about myriad ways to stand toeto-toe with big box retailers on nutrition. Let’s face it: On the surface, it can be intimidating trying to compete with lower prices on the wellness diets they sell. But with the right value proposition that incorporates quality and convenience, and a reasonable tolerance and acumen for managing your inventory, wellness diets can and should be a complementary and significant part of your hospital’s overall nutrition business.
Wellness diets have the potential to be in the top volume products of your practice and your practice income. All pets eat. It is better to focus on those products with high volume and profit potential even if the margin is lower instead of products with higher margins but much lower volume. Why? Volume. The volume will drive more overall dollars of profit. Any concerns about selling wellness diets for lower margins are easily erased by volume, but you must execute a plan for driving client awareness and purchasing through your practice. Compare a medication you purchase for $10 and sell for $20 to a diet you purchase for $30 and sell for $40. The markup on the medication is 100% compared to the diet at 33%. At first blush you may think you make more on the 100% markup but in fact you make the same of $10 per unit sold. And since all pets eat, if you have 4000 active patients then you have 4000 opportunities to sell the diet compared to a smaller number of patients needing a particular medication. Do the math. Home delivery can provide the added value and convenience to your clients to increase the sales volume and profits.
You may be able to sell your client a wellness diet for a few dollars more the first time in your office, but if your client is now going to have to make a trip to get it, price is going to matter more. Moreover, there’s nothing more annoying to your clients than discovering you’re out of stock or being told to call three days in advance to get what they want. And if you’re short on space, it’s even more of an issue. That’s why having a home delivery program and/or webstore will improve your inventory management issues and go far in ensuring you hold on to this valuable business.
A few additional points to remember: Stay on top of your nutrition inventory (on a real-time basis if possible). Consider the following: How fast are you able to get product delivered to your hospital or even better, to your client’s home? Be sure to turn your nutrition inventory so that you can sell it before you need to pay for it and keep it fresh for your clients.
In conclusion, inventory issues shouldn’t dissuade you from growing your nutrition business. Having a good selection of wellness products is an important value proposition for your clients. If you carry what they want at a competitive price, and make it as convenient as possible to get it to their home, your nutrition sales and profits will grow.
Using data metrics to monitor and control inventory
Earlier in this series, we devoted several articles to key performance indicators (KPIs) that veterinarians should measure and monitor.
One of the most important set of KPIs essential to your hospital or practice’s day-to-day operations are related to inventory management. At the risk of overstatement, never forget: inventory is an asset that should be closely safeguarded. And in many cases, too much of that asset can turn into a liability if it’s not generating income on a regular and predictable basis.
Key inventory KPIs include the following (although the list is not all-inclusive):
• Inventory costs as a percentage of gross revenue;
• Turn rates; and
• Inventory per FTE doctor.
The challenging part about inventory management is identifying all the variable costs of hospital consumables, pharmaceuticals and nutrition products. For example, an average metric of these total variable costs as a percentage of gross revenues for a typical veterinarian practice is between 20% and 22%. However that percentage can be appropriately higher if your client compliance in areas like heartworm and flea preventatives or nutrition is higher. But practices are unique so you really need to know the number that is right for your practice taking product sales and service revenue into consideration.
Remember that none of this kind of inventory data is useful without an accurate balance sheet, which stems from regular counting and reclassification of inventory costs between the income statement and balance sheet. Conduct physical inventory counts on a regular basis and don’t simply rely on what’s in your computer inventory management software. A common practice across any industry is cycle counting, which essentially works like this: Every day you count a certain number of items until you count the entire inventory. Then, you repeat the process; each time checking the data against the numbers in your PIMS. A good cycle counting system counts the higher value and/or regulated items more frequently than lower value items. As an example, I might count Heartworm/Flea/ Tick medication every couple of weeks and gauze pads once a quarter.
You may be surprised to learn that about half of your pharmacy inventory alone is for items you bought but don’t actually re-sell like gauze pads and sterile gloves. It’s critical you keep tabs on these as well. You may also be surprised to learn that many practices don’t do a good job of adjusting their balance sheet for on-hand inventory value.
As the majority of veterinary practices use cash based financial reporting they don’t always record inventory and they should. An inaccurate balance sheet leads to skewed and often erratic profitability results that make it difficult to “manage by the numbers”. For best inventory management, it is critical to have both an accurate figure for the items sitting on the shelves at a particular date (i.e. the balance sheet amount) and an accurate figure for those sold during a particular period (the expense included in the income statement.) Accurate cash-based financial (and tax) reporting requires adjustment of the balance sheet for the value of inventory on hand that has been paid for but not yet used or sold.
Work toward best practices in managing your inventory and help your practice remain financially sound. You may also sleep better at night.
About the Author
Dawn Burdette, Executive Director, Sales Leadership and Development has served HSAH for over 25 years. Dawn has served in a variety of positions in sales and management. This includes training our sales force on the business of veterinary medicine and bringing business solutions to our customers that increase financial success for veterinary practices. Dawn currently serves on the AVMA’s Veterinary Economic Strategy Committee.