Inventory management impacts profitability and practice value

Feb 8, 2017 by Edward L. Blach, DVM, MS, MBA

Inventory and related services such as radiology costs, laboratory costs, and others, represent the second largest expense category in most veterinary practices.  The category is known in the chart of accounts as Cost of Professional Services (COPS).  Typically, COPS represents between 15 and 35 percent of revenue.  Those with lower COPS as a percent of revenue are typically more profitable than practices whose COPS are in the higher range.  

In evaluating your practice, determine your COPS.  Then divide that COPS number by your revenue for the same period of time.  That is your COPS as a percent of revenue.  If your COPS as a percent of revenue is 30 percent, and you set a goal to reduce it to 20%, when you succeed, you will have increased your profitability by an equivalent 10% of revenue, assuming that all other areas remained the same.  If you have a $2 million per year practice, you will have improved profitability by $200,000 per year.  That means you have $200,000 in additional cash flow from your practice.  There is great impact on practice value as well.  Since practices are valued based upon a multiple of earnings or profits, this $200,000 in added profit contributes greatly to increased practice value.  In today's market, a single practice might be valued at 6 or 7 times earnings.  That means that by improving your inventory management by reducing inventory as a percent of revenue by 10 percentage points, you will have added between $1,200,000 and $1,400,000 to your enterprise value.  

As a practice manager, or owner, associate, or staff member, is that result a worthwhile endeavor to pursue?  If you want job security and advancement opportunity, this is a great way for you to add significant value to the practice.

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