In this episode of the Inventory Nation Podcast, I’m reviewing how elevated inventory costs can impact your practice and my top five tips for reducing COGS in your practice.
Cost of Goods Sold (COGS), typically represented as a percentage of revenue, is arguably the most important and indicative of your hospital’s inventory health. As a general rule, your hospital’s ideal COGS percentage will depend on your unique situation. Livestock, equine, and mixed animal practices will have a higher cost of goods than small/companion animal practices. Specialty and emergency hospitals will have lower COGS than their general practice counterparts.
You can calculate your current cost of goods as a percentage of revenue from your practice management software or your accounting software. The first step is to find the total cost of goods for a time period (ex, 1 month, or 12 months). This will likely be more accurate from your accounting software (but that’s not always the case). The next step will be to find your revenue for the same time period. Once you have the two figures, you’ll divide the cost of goods by the revenue. Next, you’ll multiply by 100 to find the percentage.
You can use the formula below to calculate your COGS as a percentage of revenue.
An industry-wide, commonly accepted COGS as a percentage of revenue benchmark is 20%. If your COGS are higher than your hospital’s benchmark, this is indicative that you are spending too much on inventory in comparison to your revenue. There are several ways to decrease your COGS, but an excellent starting point is to complete an ABC analysis
. This will identify specific causes for high COGS and set the foundation for reducing your overall inventory costs.
Specialty and emergency hospitals typically have a lower COGS because they don’t carry as much inventory (i.e. vaccinations, heartworm or flea & tick preventatives, or many prescription diets, etc.). On the flip side, equine and livestock practices have higher COGS because the markup and profit margin percentages are typically lower than those in companion animal practices.
Three things that contribute to high cost of goods sold include:
- Overstocked products
- Too many kinds of products
- No definite system of what and how much to order