Getting Inventory Under Control

Managing inventory can be difficult to discuss concisely but here are a few starting points.

Most practices can keep their cost of goods sold (associated with inventory) in the range of 18 to 20% of gross revenue. Meaning everything that has to be constantly reordered (pills, vaccine, gloves, needles, etc...) is the inventory. Not equipment (monitors, forceps, clippers). If you devide the cost of goods sold by the revenue you will get a percentage. Since it’s a percentage, two things can change that percentage up or down. Either the revenue goes up and expenses stay the same or revenue stays the same and expenses go down. You may need to work on both since getting a big change in either independently may take time.

Tips to getting it in the 20% range:

Revenue:
Not all practices have the same cost of doing business. Certainly the sales clerks at Nordstroms are going to be a bit more costly to hire than those at TJ MAXX or some other discount clothing store. The best locations have a higher rent cost, so restaurant menus have to take that into account as well. In some instances you will need to adjust your fees reflective of your cost of doing business. Not only accounting for these costs but possibly management's inefficiency in adhering to good management policy.

Prices:
Need to raise revenue? Three ways, more client visits, more invoice items or higher fees. Getting more clients can be costly and will take time, better client education will increase invoice item count, and a few well placed fee increases automatically increase revenue even with the same volume of sales.

Price Increases and Discounts:

Be careful in this economy with price increases. Shoppable items (spay, nail trim, vaccines) should be off limits, but non-shoppable items (in house hematocrit, second view of radiograph, IV catherization) are all fair game. Who is going to ask you what the second view costs for their dog's broken leg, then rush down to the competition to shoot that second view if it's a bit cheaper?

Discounting is dangerous. It immediately reduces income, and it can be difficult to raise the bar later. Lower prices too much and clients may pschologically reclassify your practice, making a return to higher prices nearly impossible. The time to discount other than a quick sales campaign is only when you've reached survival mode (need cashflow drastically) otherwise its best to go easy with discounts and specials.

Where do COGS amounts increase?

There are three zones in the practice that affect inventory costs.

1. Front door 2. Treatment and Surgery 3. Backdoor

1. Products leave the frontdoor without contributing to revenue either by clients not paying for an item (misbilled) or embezzlement. If Mary carries a bag of catfood out to the client's car but Bill at the front desk doesn't get it on the invoice, the practice pays the supplier the cost of the food but never collected the corresponding revenue. If the client pays Bill, and he slips it in his pocket, same effect.

Think embezzlement can't happen at your practice? Think again. It happened at mine, its commonly the most trusted employees. Every year practices tell me about the discovery of embezzlement, sometimes after I've helped them discover the high percentage amount spent on inventory, prompting them to look harder.

2. Two common occurances in the middle part of the hospital causes loss of revenue. Busy practices often forget to put a treatment or service on an invoice, especially vulnerable is the multi-day hospitalization case or complex surgery. The second common cause is discounting. Generally the doctors should never complete the computer invoice other than identifing procedures completed. Doctors adjusting the invoice total or giving away services means no revenue but overhead expenses are still present.

3. Products leave the backdoor two ways, the trash (expiration/breakage) and theft (backpacks/purses). An otherwise well meaning employee might think a few doses of flea preventative or bandage material is not going to make an impact on the practice but it does. Large practices with a big staff are greatly affected even if each staff member only steals occassionally. Expiration and breakage is also a cause of lost revenue. Be very wary of the buy 8 get 2 free deals. You've just now committed to selling 10 units, have likely paid for those up front, and the responsiblity of warehousing those items was just transfered from the distributor to you. To prevent inventory swell and potential loss of sales on excess products, don't let specials cause your inventory turn over to extend. In otherwords, buy close to the amount of units you normally would for any period and enjoy the cost savings. If you sell 30 units in 90 days, order 30 units, you'll get 6 free. Becareful about ordering 60 units to get 12 free if it means you'll have some units on the shelves twice as long as you normally would.

Theft can be reduced with the use of cross checks, inventory counts, and security devices like security cameras.

You'll need to work on all three areas, front, middle and back to be effective. a 15% improvement in each zone has a 45% net effect, so small wins can lead to big victories.

Urgency Guide:

If your inventory costs consume 20% or less of your revenue, just keep working to fine tune it, but right now you are doing fine.

22-25% - set up a monitoring plan and get busy, loosing extra profits can hurt in a bad economy, and luckily the correction back to 20% isn't going to be a big one.

26-30% - If high inventory costs were a cumbustable item, someone would be ringing the fire bell. This is certainly getting to a level where it should become a top management priority. Too long at this level and other areas of the practice will suffer.

>30% - unless your practice is doing a large amount of retail sales on very low profit items (ie. bovine practice that sells a lot of vaccine and other OTC items) you need to sound the alarm. Next to payroll, inventory is the second largest cost in your practice. No other expenses savings can make up for high payroll and/or inventory costs because these two categories are just so large. If your inventory costs are 30% or more, and its not a result of retailing a large amount of low cost products, then the practice is at risk of financial failure. Loosing an additional 10% of gross revenue can mean thousands of dollars annually. If you're in this category look to these three areas first a) embezzlement b) doctor discounting c) product or services mis-pricing.

On more than on occasion, practices investigating high inventory costs have found they had inadvertently failed to adjust their prices reflective of new manufacturer or provider costs. Failure to increase fees in step with fee increases from other providers (lab fees following a referral lab pricing increase, failure to reset pet food prices subsequent to price hikes from the manufacturer, failure to adjust fees when insurance costs increase), and failure to insure quantity or size correctly matches your prices (new shipment of 500mg tabs put under the 250mg tabs code) in the computer are commonly found mistakes.

Byron Farquer, DVM, AVA

Author:
Dr. Farquer is a recognized expert in practice valuation, published author and national lecturer on ownership transition and practice management/marketing. He is currently on a year-long national tour speaking on inventory related issues including product sales within and outside of the veterinary hospital.

photo courtesy of geekologie

Independent Contractors vs. Employees: Keeping Them Straight

When the IRS looks at the contractors your business works with, it's looking for any signs that a contractor is misclassified. If there's even a sign that someone you're paying as a contractor might actually be classified as an employee, the IRS will reclassify him as such. That sort of decision can prove very expensive for a business owner: there are fines and penalties associated with the process, as well as a requirement that the business owner pay back payroll taxes.

Contractors Versus Employees

For the IRS, telling the difference between a contractor and employee is a matter of determining just how independent the individual is from the company he's working for.

An independent contractor is not under the 'employer's' control. An independent contractor negotiates their rate of pay, can set their own schedule, can refuse work or projects, provides an invoice on their letterhead for services performed, often works for other people, uses their own supplies, may get reimbursed for expenses, usually works on a project by project basis rather than for an indefinite period. When an independent contractors services are terminated, they are not eligible for unemployment benefits. To keep out of trouble and learn more (click here).

Good fees, bad fees - By Mark Opperman

In my opinion, there's a fine line between overitemization and underitemization on your invoices. Break out every IV set and suture pack as a separate line item—like a human hospital does—and clients will feel they're being nickel-and-dimed. Hand over an invoice that simply reads, "For services rendered: $825," and you're again facing a fuming client. But you don't want to—nor can you afford to—fail to charge for services rendered and costs incurred. The solution is ... (read more).

Equipment and Furnishings For Your Practice

Equipping a new practice can be a daunting task. Luckily there is a good list outlining the most common needs of every room in the practice. A partial list is below, but you can find the entire list if you click here.

An example of the list follows and you can use this not only as a guide but I suggest you place the list items in a spreadsheet. Create columns for notes like source, price, importance etc... Because spreadsheets give you unlimited sort options and "what if" scenarios, you can use the list to help build a budget. This is especially useful when working with your lender. It's a convenient way to go back and revise your list quickly to stay within budgets imposed by your business plan and lender requirements. Happy shopping!

List by Hospital room - Provided by Hospital Design/DVM360/Advanstar.

Exam rooms

Desktop computer central to all exam rooms
Exam tables
Rolling chairs or stools
Side chairs
Dog treats
Magazines
Cabinets
Waste receptacles
Chart holders
Sharps containers
Nail trimmers
Stethoscopes
Styptic powder or pencils
Reflex hammer
Eye wash
Cotton-tip applicators
Assorted gauze
Alcohol
Lubricating jelly
Storage jars
Gloves
Feline scale
Small exotics or gram scale
Otoscope
Otoscope cones
Ophthalmoscope
Indirect viewing lens
Radiography view box
Exam lights
Binocular head loupe magnifier
Thermometers
Video otoscope
Schirmer tear tests
Fluorescein dye
Assorted syringes
Penlights
Anatomic models and posters


Treatment area, pack prep, and lab

Rolling stools
Side chairs
Refrigerator for samples
Walk-on scale
Wet table
Waste disposal container (general)
Waste disposal container
(infectious)
Dental unit: scaler, drill, polisher
Dental instruments and supplies
Safety goggles
Endoscope and supplies
Blood pressure monitor
Portable O2 unit
Electrocardiograph
Test tube rack
Hematology, chemistry, and coagulation analyzers
Centrifuge
Hemocytometer
Unopettes
Manual cell counter
Calculator
Timer
Ultrasound machine and supplies
Refractometer
Glucometer
Radiography machine and film cassettes or digital radiography equipment
Lead gloves and aprons
Patient positioning devices
Radiograph developing supplies
Gloves
Masks
First aid kit
Crash cart
Resuscitation bag
Clippers
Tonometer
Ear lavage equipment
Tongue depressors
Thermometers
Splinting equipment
Culture media
Diagnostic reagent strips
Microscope
Microscope slides, coverslips, stains, and holders
Bacterial incubator
Inoculation loops
Lab mailing supplies
Sterility indicators
Laryngoscopes
Biopsy jars
Formalin
Ethylene glycol test kit
FeLV/FIV test kits
Heartworm tests
Elizabethan collars
Muzzles
Autoclave and trays
Autoclave tape
Ultrasonic cleaner
Endotracheal tubes, stylets, and cleaning brush
Endotracheal tube rack
Feeding tubes
Chest tubes
Tracheostomy tubes
Stomach tubes
Stomach tube speculum
IV fluid warmer
IV poles and stands
Fecalizer, centrifuge, and flotation solution
Fecal loops, sample collection containers
Nonabsorbent cat litter
Urine collection containers
Activated charcoal
Gastric lavage supplies
Barium
Wood's lamp
Surgical pack wraps
Surgical caps, masks, gowns, and gloves
Disinfectants
Surgical scrub brushes and soak trays
Surgical instrument cleaner
Suture scissors
Staple removal forceps
Vaginal speculum

Start‐Up or Acquire?

Start‐Up or Acquire? A Very Important Decision the Aspiring Practice Owner Must Make
David Lucht
President COO & CCO
Live Oak Bank
Are you an associate veterinarian with plans to eventually own your practice? Have you thought about owning the clinic where you practice? Or maybe you’ve thought about building your own state‐of‐the‐art veterinary facility in hopes of reaching out to an underserved market? We at Live Oak Bank specialize in the financing of veterinary practices and witness each of these scenarios on a daily basis. The veterinary industry has historically allowed for the practicing DVM to venture out into the entrepreneurial arena and become extremely successful.
While practice ownership may not be for everyone, if you are so inclined, the following tips may be of interest when approaching the hurdle of acquiring or starting your own practice. Maybe the first, and most important decision you will make, will be to purchase an existing practice or start your own from “the ground up.” I spoke to a veterinarian recently, practicing in a fairly rural market, facing this task. She felt very strongly that her specific market, where she has practiced for the last five years, could support an additional single doctor practice. This area was home to her, and she had been with the only other practice in the area for five years. In conversations with our potential borrower, I recall that after careful consideration, she went forward with her decision to build a new clinic, although if circumstances had allowed she would have liked to purchase an existing practice. After researching different resources, including the Simmons and Associates Web service, she was not able to find a practice for sale that met her geographical requirements (Simmons and Associates is a brokerage and consulting company that assists veterinarians in valuating, managing and selling their practices). After careful market analysis Live Oak Bank decided to assist this particular veterinarian in financing the purchase of a one acre track of real estate and the construction of a new veterinary facility. The key to a successful start‐up from a financial perspective is not to over‐build your cost structure and payments to a level where the market can’t support them in a reasonable time frame.
The alternative to starting from scratch is obviously to buy an existing practice. If a practice is for sale in an area where you would like to work and live, we generally consider this to have less risk. The start‐up project requires an uncertain construction period as well as an opening phase, often characterized by low revenues (and lower compensation to you) in the early years of operation. Because of these risks, more up‐front equity is often required of the borrower and you may receive a slightly higher interest rate.
Why is the other example, the practice acquisition from the retiring owner, often significantly less risky than a start‐up? The answer is that an existing practice generally has a solid base of customers with an ongoing stream of revenue and cash flow. It is extremely important to make sure you understand the nature of the customer base, but assuming the practice is generating a quality stream of revenues, you have cash flow and customers the minute you open for business.
Hopefully, you may also find that that the existing employees are well‐trained and competent. You need to very carefully investigate any practice you are buying, making sure the practice has a good reputation, attracts the customers you want to service, etc.
If you can then grow this existing customer base by providing new services, or extending hours, etc., you can create a lot of value very quickly. Our experience in the industry has revealed a very interesting yet practical result; we believe that your energy level and desire to provide the best services in your market will immediately increase revenues to provide for continued growth over your first few years as the practice owner.

The direction you take regarding start‐up or acquisition may be the most important decision you’ll ever make. Each future practice owner is unique, and not every market has a practice for sale that would suit you. At Live Oak Bank, we finance both start‐ups and acquisitions, but believe that existing practices carry slightly less financial risk.

Vets Fare Relatively Well During Current Credit Pinch

Vets Fare Relatively Well During Current Credit Pinch
By Jessica Tremayne
Reprinted from Veterinary Practice News

Despite the upheaval in the U.S. financial landscape, veterinarians remain one of the top three most reliable professions to lend to, joining dentists and physicians.

Experts say the availability of veterinary business loans has stayed stable as well.

Working off the concern of member veterinarians, the American Animal Hospital Assn. conducted a study of the economic impact on practice revenues.

Of the veterinarians polled, 93 percent said they were working off of actual data as opposed to a gut feeling. Fifty-six percent reported a revenue increase in the first six months of 2008 compared to 2007, while 28.4 percent said their revenue had fallen.

About 79 percent of those polled in the AAHA Rocky Mountain Market Research survey said they do not anticipate a decrease in total revenue in the last six months of 2008.

“We had received a number of inquiries, both from the media and from companies in the animal health industry, asking whether economic conditions had resulted in pet owners seeking less veterinary care for their pets,” says John W. Albers, DVM, executive director of the AAHA. “We only had anecdotal information, so we conducted the study.”

Although results may vary by region, the profession’s integrity has remained intact, veterinary lenders report.

Pet Owners Wary
Practitioners’ financial concerns are valid, considering that 68 percent of pet owners polled last December for a pet-spending survey said they believed their finances would be the same or worse in 2008 compared to 2007. The Fleishman Hilliard International Communications survey of 665 pet owners was initiated to obtain a better understanding of the ideology of the pet-owning population in trying economic times. read more

IRS changes vehicle milage rates in 2009

In a recent article on SmartStart Practice, we published the tax rate changes affecting veterinarians in 2008 vs. 2007. Recently the IRS changed the vehicle mileage rates again. During the second half of 2008 mileage rates were increased to 58.5 cents per mile in response to increased fuel costs. This rate will be downgraded to 55 cents per mile for 2009. When tracking your mileage expenses for 2008, you should be using 50.5 for the first 6 months, 58.5 for the last 6 months of 2008 and then 55 for 2009.

Additionally you should be aware that as of January 1, 2009 the following apply:
55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

As always, we recommend you check www.irs.gov for the most current recommendations.