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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. This is also a major data point that buyers will focus on when considering purchasing your hospital.

What is COGS in a veterinary hospital?

COGS refers to the direct costs associated with materials and supplies used to provide veterinary services. These are costs incurred in providing 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 only on equipment and supplies directly related to patient care. The key elements of COGS in a veterinary hospital are:

• Medical supplies: disposable items such as gloves, syringes, bandages and antiseptics.
• Pharmaceuticals: drugs, vaccines and anesthetics administered to patients.
• Surgical equipment: items such as sutures, drapes and sterile instruments.
• Diagnostic tools: laboratory tests, imaging and other diagnostics carried out on site or subcontracted.
• Laboratory fees: External laboratories that perform tests, such as blood work, cytology or histopathology.
• Anesthesia supplies: equipment and consumables including masks, tubes 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 providing services. Here’s why it’s important to keep an eye on COGS:

• Profitability Overview: High COGS can erode profits even if revenue appears strong. Monitoring this metric ensures your pricing strategies and margins remain healthy.
• Pricing Decisions: COGS directly affects how you should price veterinary services. If COGS is too high relative to prices, profit margins decrease. y Inventory management: COGS analysis helps you identify inefficiencies in supply usage or over-ordering, thereby avoiding waste and overstocking.
• Budgeting: Knowing your COGS helps create more accurate budgets and financial forecasts, enabling better cost management and growth planning.

How to Calculate COGS in a Veterinary Hospital

To calculate COGS for your veterinary hospital, 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 equipment on hand at the beginning of the period (e.g. month or quarter).
• Purchases: The cost of additional materials and supplies purchased during the period.
• End of period inventory: value of veterinary supplies and equipment remaining at the end of the period.

For example, if you start the quarter with $10,000 of supplies, purchase $5,000 of additional materials during the quarter, and have $4,000 left in inventory at the end, your COGS for the period is: 10,000 $5,000 plus $4,000 equals $11,000. This $11,000 represents the cost of goods consumed during the quarter, which is directly related to the services rendered.

Key Strategies for Managing and Reducing COGS

COGS in a veterinary hospital can fluctuate significantly depending on how well cost management is done. Poor inventory management can lead to overstocks or out-of-stocks, which increases costs. Hospitals should implement the following steps to streamline inventory:

• Automate inventory tracking: Use hospital management software to track real-time inventory levels, set replenishment alerts, and reduce overorders.
• Build relationships with suppliers: Build strong relationships with suppliers and consider negotiating discounts on bulk purchases to reduce procurement costs.
• Evaluate inventory turnover: Regularly evaluate inventory turnover rates to ensure you are not holding on to supplies too long, which could lead to expiration and waste.
• Evaluate Supplier Contracts and Costs Regular review of supplier contracts is essential. Sometimes long-standing suppliers may increase their prices gradually over time. Consider the following:
  • Price comparisons: Periodically compare prices from different suppliers to ensure you get competitive rates for materials you purchase frequently.
  • Supplier Consolidation: Buying from fewer suppliers can lead to better discounts and easier tracking of supplies.
• Optimize treatment processes Optimizing how materials are used during procedures can also reduce COGS. Note the following:
  • Efficient use of materials: Train your staff to minimize waste of expensive materials, such as surgical sutures or diagnostic tests. Small amounts of wasted materials can accumulate over time.
  • Procedure standardization: Standardize processing protocols to ensure consistent use of materials across different procedures. This prevents overuse of materials and makes ordering supplies easier.
• Monitor laboratory costs Diagnostic and treatment costs can represent a significant portion of COGS. Consider the following:
  • Negotiate lab fees: If you have a high volume of lab work, negotiate better rates with outside labs.
  • In-house capabilities: For hospitals performing many tests, investing in in-house diagnostic equipment can reduce external laboratory costs over time.

Monitor COGS regularly

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

• Spot trends: Quickly identifying rising trends in procurement costs helps you address the issue before it impacts your bottom line.
• Set budgets: With regular monitoring, you can create more accurate budgets and ensure 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 equal to or less than 23% to 27% of a general veterinary hospital’s revenue, depending on the types of services rendered. A hospital offering premium services may see a higher COGS percentage, while a general veterinary hospital may have a lower COGS percentage. If your hospital’s COGS percentage approaches, or worse, eclipses 30%, you may have a problem to solve.

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. is equal to 0.25, multiplied by 100 is equal to 25 %.

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