Doing the math for products and supplies in veterinary practice
In a presentation at the Midwest Veterinary Conference, Karen E. Felsted, CPA, MS, DVM, CVPM, CVA, addressed the high cost of poor inventory accounting and how to do it right
As one of the largest expenses that often goes overlooked and under-scrutinized, inventory is a foundational aspect of veterinary practice operations. Mistakes, miscalculations, and flawed strategies regarding inventory management and accounting can be tantamount to burning cash.
“When you buy a lot of stuff and have it sitting on the shelves, until you sell it, that’s essentially dollar bills just sitting right there,” said Karen E. Felsted, CPA, MS, DVM, CVPM, CVA, while presenting a session at the recent Midwest Veterinary Conference, hosted by the Ohio Veterinary Medical Association. It is crucial to properly keep track of those “dollar bills” occupying the practice’s inventory space, she added.
How to spot a problem
During her presentation, Felsted said that inventory management is often handled incorrectly and inefficiently. Even though it is easy to get it right, many practices can find the task tedious and avoid examining their processes closely to determine if everything is on the right track. “Poor control can definitely reduce profits by a large amount,” said Felsted. “When I look at practices and calculate their profitability, one of the biggest reasons that I see for a practice not being profitable is related to inventory costs.” In addition, she noted that improper inventory accounting can lead to shortages that can impede patient care.
Felsted said a good place to start is by comparing your practice expense to published benchmarks from the American Animal Hospital Association (AAHA) and the Well-Managed Practice Benchmarks (WMPB) from WTA Veterinary Consultants. These benchmarks show expense as a percentage of gross revenue by different inventory categories like drugs and medical supplies, dietary products, and over-the-counter products. If your expenses differ significantly from these benchmarks, it may indicate problems such as an accounting discrepancy, a theft issue, or that the practice is sending product home with clients without charging for it.
Another common concern noted by Felsted is when the inventory assets on the balance sheet don’t match the same dollar amount of product on hand according to the practice information management system (PIMS) and/or an actual physical count of inventory. When these numbers don’t line up, it is impossible to manage inventory properly and identify problems such as product loss.
The case for physical counts
According to Felsted, physical inventory counts are crucial for ensuring the integrity of the practice’s inventory data. “Physical counts, without a doubt, are the most significant procedure to help understand if your PIMS report is right and if the quantities and dollar amounts you have in your inventory system are accurate,” she said.
Although it may seem like common sense, Felsted said many clinics do not do physical counts at all. Of those that do, most will only perform a year-end count, which is inadequate for good control, according to Felsted. She recommended practices perform counts of key products at least monthly.. “We don’t care if every once in a while, there’s a one-box difference in some kind of heartworm prevention,” said Felsted. “We do care if regularly every month, there’s a five-box difference…because that’s just looking to be a little more suspicious.”
The best way to tackle this problem is to focus on the items that have a large financial impact on the business, such as flea and tick preventives, food, heartworm preventives, and other high-value items. The team can devote an hour or two, once per week, to count one fourth of the key inventory items and compare it to what is in the PIMS. She added that doing the counts in a visible, transparent way will stress the importance of inventory accounting on the staff while deterring theft and other breakage.