Understanding COGS in a veterinary hospital

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In any veterinary hospital, maintaining a healthy profit margin depends on controlling operational expenses, including the often-overlooked cost of goods sold (COGS). Understanding and managing COGS is crucial for long-term financial health as it directly impacts profitability. It is also a major data point that buyers will focus on when considering the purchase of your hospital.

What is the COGS in a veterinary hospital?

COGS refers to the direct costs associated with the materials and supplies used to deliver veterinary services. These are costs incurred to provide care to animals and include items that are either consumed during treatments or are part of the veterinary services provided. Unlike operating expenses, which cover rent, utilities, and salaries, COGS focuses solely on materials and supplies directly linked to patient care. Key components of COGS in a veterinary hospital include the following:

• Medical supplies: Disposable items such as gloves, syringes, bandages, and antiseptics.
• Pharmaceuticals: Medications, vaccines, and anesthetics administered to patients.
• Surgical materials: Items such as sutures, drapes, and sterile instruments.
• Diagnostic tools: Laboratory tests, imaging, and other diagnostics conducted onsite or outsourced.
• Laboratory fees: External laboratories that perform tests, such as blood work, cytology, or histopathology.
• Anesthesia supplies: Equipment and consumables that include masks, tubing, and monitoring devices.

Why COGS is important for veterinary hospitals

Tracking COGS is crucial because it allows hospital owners to understand the relationship between revenue and the costs of delivering services. Here’s why keeping an eye on COGS matters:

• Profitability insight: High COGS can erode profits even if revenue appears strong. Monitoring this metric ensures that your pricing strategies and margins remain healthy.
• Pricing decisions: COGS directly affects how you should price veterinary services. If COGS is too high compared with pricing, profit margins shrink. y Inventory management: Analyzing COGS helps you identify inefficiencies in supply use or overordering, preventing waste and overstock.
• Budgeting: Knowing your COGS helps in creating more accurate budgets and financial forecasts, enabling better cost management and planning for growth.

How to calculate COGS in a veterinary hospital

To calculate your veterinary hospital’s COGS, use this formula: beginning inventory plus purchases minus ending inventory equals COGS. Let’s break this down:

• Beginning inventory: The value of veterinary supplies and materials on hand at the start of the period (eg, month or quarter).
• Purchases: The cost of additional materials and supplies purchased during the period.
• Ending inventory: The value of veterinary supplies and materials that remain at the end of the period.

For example, if you begin the quarter with $10,000 in supplies, purchase an additional $5000 worth of materials during the quarter, and have $4000 left in inventory at the end, your COGS for the period is: $10,000 plus $5000 minus $4000 equals $11,000. This $11,000 represents the cost of the goods consumed during the quarter, which directly relates to the services provided.

Key strategies for managing and reducing COGS

COGS in a veterinary hospital can fluctuate significantly based on how well costs are managed. Inventory mismanagement can lead to overstocking or stockouts, both of which increase costs. Hospitals should implement the following steps for streamlining inventory:

• Automate inventory tracking: Use hospital management software to track inventory levels in real-time, set reorder alerts, and reduce excess ordering.
• Build vendor relationships: Build strong relationships with suppliers and consider negotiating bulk purchase discounts to lower supply costs.
• Assess inventory turnover: Regularly assess inventory turnover rates to ensure you are not holding on to supplies for too long, which could lead to expiration and waste.
• Evaluate supplier contracts and costs A regular review of supplier contracts is essential. Sometimes, long-standing suppliers may increase prices incrementally over time. Consider the following:
  • Price comparisons: Periodically compare pricing from different suppliers to ensure you’re getting competitive rates for the materials you purchase frequently.
  • Vendor consolidation: Purchasing from fewer vendors can lead to better discounts and easier tracking of supplies.
• Optimize treatment processes Optimizing how materials are used during procedures can also lower COGS. Note the following:
  • Efficient material use: Train your staff to minimize wastage of expensive materials, such as surgical sutures or diagnostic tests. Small amounts of wasted material can add up over time.
  • Procedure standardization: Standardize treatment protocols to ensure consistent material usage across different procedures. This prevents the overuse of materials and makes ordering supplies easier.
• Monitor laboratory fees Fees for diagnostics and treatments can be a significant part of COGS. Consider the following:
  • Negotiating lab fees: If you have a high volume of lab work, negotiate better rates with external labs.
  • In-house capabilities: For hospitals performing many tests, investing in in-house diagnostic equipment can reduce external lab costs over time.

Track COGS regularly

Tracking COGS should be a monthly or quarterly task for hospital owners and managers. Regular monitoring allows you to:

• Spot trends: Identifying trends in rising supply costs early helps you address the issue before it impacts your profitability.
• Set budgets: With regular tracking, you can create more accurate budgets and ensure that actual COGS remains aligned with projections.

COGS as a percentage of revenue

One of the most useful ways to analyze COGS is as a percentage of total revenue. Ideally, COGS should be at or below 23% to 27% of revenue in a general veterinary hospital, depending on the types of services performed. A hospital with higher-end services may see a higher COGS percentage, while a general veterinary hospital might have a lower COGS percentage. If your hospital’s COGS percentage is approaching, or worse, eclipsing 30%, you may have an issue to address.

To calculate COGS as a percentage of revenue, divide COGS by total revenue and multiply that amount by 100. For example, if your hospital’s COGS for a given period is $25,000 and your total revenue is $100,000, the COGS percentage is: 25,000 divided by 100,000 equals 0.25, multiplied by 100 equals 25%.

Tracking this ratio over time helps ensure that your practice’s pricing and cost management strategies remain effective.