This article was first published in the Fountain Report on December 6, 2024. Subscribe to the Fountain Report.
Too often, I hear about COGS (cost of goods sold) being approached with a sledgehammer.
A sledgehammer to your COGS may look like tight budget caps or reducing employees’ autonomy to order at their discretion. It may look like sweeping price increases or chasing discounts and ending up with stock that doesn’t align with actual consumption. Sometimes, taming COGS can even look like sledgehammering growth-oriented spending, such as staff pay raises, or investments in new equipment.
While this heavy-handed approach may feel like a quick fix, it often fails to address the root cause of high COGS – and is as extreme as burning down a house to get rid of a spider. In addition to hurting patient care and staff morale, such tactics ultimately diminish practice profitability, even leading to a below-market valuation when it comes time to sell.
So why reach for a sledgehammer? Frankly, hospitals lack clear visibility into their COGS. Without that insight, when an issue arises, the only option may be to treat the whole system instead of making a targeted, surgical cut to fix the specific problem.
Luckily, this is vet med and we’re trained to use scalpels, not sledgehammers. Just as we wouldn’t perform surgery without running the proper tests and a clear diagnosis, managing a business requires the same careful approach. So, how can you equip yourself with the right tools and insights to avoid working blindly or resorting to drastic measures?
One tool available is the hospital P&L statement. A P&L is a great starting point as it provides the big picture and can highlight when finances seem off. But where should you look first – revenue, costs, or specific categories? While these financial statements are great indicators, they typically lack the specificity needed to identify the exact drivers of those results. So, where do we go from there?
The next resource to consider is purchase data. Hospitals have several ways to track costs, including supplier reports, ERP (invoicing) systems, physical invoices, and VetCove. More advanced practices might even use a purchase order system. This data allows you to monitor the costs of the items you use and identify shifts in products or categories through reporting. However, costs alone don’t tell the full story of COGS. The investigation continues.
Next, you can review your PIMS. These systems provide essential information about sales and client prices. Depending on your practice and the system you use, you might also utilize the PIMS inventory module to track costs, set markups, and monitor inventory. If you’re really on top of your game, you might even have an accurate estimate of your inventory on hand. With this level of detail, PIMS can help calculate key financial metrics, including gross profit margin.
Despite the value of these insights, relying on PIMS to manage inventory involves many manual processes and is prone to errors. PIMS reflects transactional data, which doesn’t always correspond with actual consumption. One practice even shared how their system showed 40,000 gallons of euthanasia solution in stock (!) – a mistake caused by inventory being added but never subtracted. Frequent changes in product SKUs, fluctuating costs, and data entry mistakes from multiple users only add to these inaccuracies. Clearly, while PIMS is helpful, it’s not enough on its own. Where does the real story lie?
To get the full picture, we need to consider all sources of information – P&L, purchase records, sales figures, and inventory on hand and consumption. Together, these provide visibility into cost, price, velocity, and sales, covering all the non-labor elements required for a proper diagnosis. However, this data remains disconnected, and financial success relies on both accuracy and understanding of these relationships.
This is where Inventory Ally comes in. Inventory Ally bridges these points, offering a clear view of inventory levels and consumption patterns while providing the visibility you need to understand how they impact your business.
With deep investigation and analysis, Inventory Ally helps uncover the true origins of high COGS, equipping your team with the tools to diagnose and treat the root issues effectively. Maybe a product’s cost spiked, but client prices didn’t follow, leaving you barely breaking even – or worse. Caught proactively, you could adjust markup, negotiate a discount, switch to a more cost-effective alternative, or tweak DVM commission to cover the gap. Perhaps anticipated shortages lead to a necessary overstock. With visibility, that could be addressed by spreading the spend over an extended timeframe that reconciles with the turn rate of the extra value on your shelf. Or, maybe you have a surge in indirect spending – products used but not directly billed to clients? With machine learning and predictive analytics, Inventory Ally can provide an accurate picture of items used within a procedure and their associated costs.
The possibilities for improvement are endless when you approach COGS with skillful, surgical cuts instead of a sledgehammer. Treat your practice’s finances like patient care – precise, informed, and thoughtful. Now put the sledgehammer away.
