By: Camala C. Bailey, CPA, CVA

Part 2: Cost of Goods Sold – Controlling What You Can

Veterinary practice owners are feeling pressure from multiple directions. Visits are down, many clients are increasingly sensitive to affordability, and the costs of drugs, supplies, laboratory services, and labor continue to rise.

While no practice can control the broader economy, it can control how much profit quietly leaks through cost of goods sold (COGS). Inventory and COGS are daily financial levers: managing them well is one of the fastest ways to protect margin without compromising patient care, team support, or the client experience.

After more than 30 years working with the veterinary profession, I have found that practices with disciplined inventory systems and controlled COGS are among the most consistently profitable. The following are practical ways to control what you can.

Putting the Right Person in Charge

The right inventory manager is not simply the person who has time to place orders. While this individual may seem like a unicorn, they do exist. They are someone who is organized, financially disciplined, detail-oriented, technologically capable, and comfortable holding the team accountable to established procedures. Most importantly, they understand that inventory is cash sitting on the shelf. They can balance the clinics need to prevent stockouts with the financial need to avoid overpurchasing, waste, expired products, and margin leakage.

If you have a team member with the right traits but limited inventory experience, do not overlook them. Inventory-management education is readily available through conferences, online CE, distributors, webinars, and other practice-management resources. Investing in that training can turn a capable team member into a confident inventory manager—and make inventory control a meaningful contributor to practice profitability.

The inventory manager should own the process, but the entire team should support it. Doctors should communicate product or protocol changes in advance; technicians and assistants should report low stock, damaged items, and impending expirations; and the practice owner or manager should review results and remove barriers to compliance.

Purchasing: Control the Process, Not Just the Price

Purchasing should be tied to actual practice usage. It should be deliberate and efficient—not driven by vendor promotions, individual doctor preferences, or fear of running out. The goal is to purchase the right products, in the right quantities, at the right total cost, while protecting cash flow and avoiding waste.

• Join a purchasing cooperative or group. Independent practices may improve pricing, rebates, and terms through collective purchasing power. Before joining, compare membership cost, vendor commitments, rebate structure, pricing on high-use items, service levels, and whether the program fits how your practice actually purchases.
• Standardize how you buy. Assign one primary purchaser and one trained backup. Limit routine ordering authority and require approval for nonroutine purchases. Use documented par levels and reorder points rather than informal “want lists.” When properly maintained, many practice information management systems (PIMS) can calculate and support these levels. Clear ownership and a defined process reduce duplicate orders, impulse purchases, and excess stock.
• Set a replenishment budget. For many small-animal practices, a total COGS target of approximately 18% to 24% of gross revenue is a reasonable starting point, though the appropriate range varies by service mix. As an operating guide, consider budgeting drugs and medical-supply purchases at approximately 10% to 13% of production for the prior comparable period—weekly, biweekly, or monthly, depending on ordering frequency. This is a guardrail, not an automatic authorization to spend. Adjust for case demand, seasonality, specialty services, and your practice’s historical performance. Track special orders, annual buy-ins, and seasonal purchases separately so their cash-flow effects are visible and planned.
• Use online ordering and comparison tools. Resources such as AVMA Direct and Vetcove can centralize ordering, compare vendor pricing, and provide purchasing reports. Continue to rely on the PIMS as the source of truth for quantities on hand, usage, reorder points, and inventory value. Review key vendor pricing on a regular schedule—often quarterly—rather than spending staff time comparison-shopping every individual item. Price matters, but response time, delivery reliability, returns, and service can be worth more than a small unit-price difference.
• Audit vendor invoices. At least quarterly, verify that vendor cost increases are reflected in your fee schedule and that co-op or bulk-purchase arrangements truly improve margin. Also review sales-tax treatment. Rules vary by state; in Arizona, prescription drugs and items purchased for resale may be treated differently from supplies used internally. Confirm the appropriate treatment with your tax adviser and vendors—do not assume it is being handled correctly.
• Order in bulk only when the math works. Before placing a bulk order, ask: “Will we sell or use this product before we have to pay for it—and will the savings exceed the cost and risk of holding it?” If the answer is no, it is not a discount; it is simply cash sitting on the shelf. As a general rule, target savings of at least 10% before considering a bulk purchase. Even then, evaluate turn rate, expiration date, storage requirements, cash-flow effect, manufacturer terms, product substitution risk, and whether the practice can realistically sell or use the quantity before it expires or becomes obsolete.

Tracking and Controls

When was the last time you reviewed the inventory report in your PIMS? Over the years, I have seen reports ranging from negative inventory to values in the trillions of dollars—no kidding! The report is only as accurate as the underlying data, and your inventory balance directly affects both management decisions and financial reporting.

For accounting purposes, inventory is part of the COGS calculation: beginning inventory plus purchases, less ending inventory, equals COGS. If ending inventory is overstated, COGS and expenses are understated, which overstates profit and can increase taxable income. If inventory is understated, the opposite occurs. Accurate inventory is therefore not only an operational issue; it is a financial-reporting and tax-planning issue.

• Establish an accurate baseline. Start with a physical count of invoiced inventory, including medications, therapeutic diets, over-the-counter products, and retail items. Compare physical quantities to what the PIMS shows, then make the necessary adjustments so the system reflects reality.
• Treat consumables appropriately. Consider excluding non-invoiced consumables—often called white goods—from saleable inventory in the PIMS. Items such as gloves, gauze, cleaning supplies, and similar goods are continually used but typically are not relieved through client invoices. Tracking them as saleable inventory can be time-consuming and distort the report; they are generally more appropriately treated as supplies and expensed when purchased.
•  Use cycle counts. Review inventory reports monthly at a minimum. A practical approach is to count approximately one-third of invoiced items each quarter, with a full physical count at year-end. Count high-value medications, controlled substances, preventives, therapeutic diets, and other fast-moving products more frequently.
•  Investigate variances. Do not simply adjust a quantity and move on. Reconcile physical counts, purchase records, dispensing activity, credits, and returns. Look for shrinkage, receiving errors, uncharged dispensing, expired product, damaged goods, and items not relieved from inventory. Recurring variances are usually signs of a process breakdown that is quietly increasing COGS.

Pricing and Profit Protection

Inventory is like cash, and pricing protects your profit. If you do not track what products cost and update your prices appropriately, margins will quietly erode. A properly configured PIMS can help synchronize your fee schedule with current costs and identify products that require review.

Typical veterinary markups are useful reference points, but they should not be a one-size-fits-all pricing policy. A fixed markup may recover an item’s direct cost, yet it may not cover the indirect costs of purchasing, receiving, storing, tracking, dispensing, and replacing it. It also does not account for expiration, damage, shrinkage, refrigeration, controlled-substance controls, or cash tied up in stock.

Review pricing by product category to ensure it supports the margin and service level your practice needs. Consider dispensing or handling fees for lower-cost medications when a percentage-only markup does not cover the service component. At the same time, recognize that heavily shopped products—such as preventives, diets, and some chronic medications—may require a thoughtful, competitive strategy. The goal is not to charge the highest price; it is to price intentionally so the practice can provide convenient, high-quality care without giving away margin.

Key Metrics – Review Regularly

• Total COGS as a percentage of gross revenue – compare with your budget, prior periods, and benchmark (small animal practice should be 18% to 24%).
• Inventory value on hand (depending on service mix should be $13,000 to $18,000 per FTE veterinarian).
• Inventory turnover (varies by item, low volume around 5 – 8X, high volume 12X+).
• Revenue to expense ratio for pharmacy (small animal should be 2.5 to 3.0)

Conclusion

In a margin-squeezed environment, COGS is not simply an accounting line—it is a daily opportunity to protect profit. Put the right person in charge, give that person clear systems and team support, purchase deliberately, keep inventory records accurate, and price products with both direct and indirect costs in mind. These actions do not require compromising patient care or constantly increasing fees. They help your practice reduce waste, free up cash, protect EBITDA, and build the financial resilience needed to serve patients, clients, and your team well in 2026 and beyond.

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Byline: Camala “Cammi” Bailey, CPA, CVA, is the founding partner and director of tax services at CPA 4 Vets, a nationally recognized accounting and advisory firm serving veterinary practices.
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