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Revenue growth in August of 2022 compared to August 2021 appears to be very strong; however, much of this change is likely due to the fact there was one more workday in August 2022 compared to the same month in 2021. (We saw this phenomenon in reverse last month when there was one workday less in 2022 compared to the prior year.) If we looked at July and August 2022 combined, the revenue growth would be roughly 4% for VHMA practices which is less than the average over the last 12 months of 6.9%. This indicates a softening in growth.

Revenue per unique patient increased 9.3% in August 2022 compared to the same month in 2021, however, patient visit numbers only grew by 0.8%. The growth in patient numbers is probably due to the additional workday seen in August 2022. The increase in revenue per unique patient is most likely due to fee increases and some degree of greater acceptance of medical recommendations by pet owners. New client numbers continue to decline.

As I’ve said before, it’s still not 100% clear where the “veterinary economy” is going but think it is definitely softening and practices need to be prepared for that. Focusing on improvement in productivity/efficiency and client service are becoming more important again. There are many areas a practice can choose from to improve efficiency with one of them being inventory control. Many practices are familiar with the key controls that need to be in place for inventory to be tightly managed. However, many practices DON’T realize that flaws in their inventory accounting system may be hindering their ability to manage inventory well.

Most practices review their drugs, medical supplies and food expense numbers to help determine if their costs are too high. There are published benchmarks readily available for comparison for primary care companion animal practices. And while every practice is a little different, these benchmarks can be very effective in determining if a problem may exist. For this comparison to be effective, however, the expense figures in the practice’s financial statements and tax returns must be accurate and often these figures are not correct.

When analyzing inventory expense, the figure should represent what drugs, medical supplies and food items are USED or SOLD TO CLIENTS during the period in question, not what items are PURCHASED. This is a critical distinction. When a cash basis of accounting is used, the expense included in the profit and loss statement (P&L) is often what is purchased, not what is used. In accrual basis financial statements, the expense should be what is used or sold to clients not what is purchased. In both cases, poor inventory control or random adjustments may mean that the figure is inaccurate so even when accrual accounting is used, the figure may not be accurate.

There are two critical inventory figures in the practice’s financial statements:

•  Inventory expense (P&L statement)
• Inventory asset (Balance sheet)

Ideally, when inventory is initially purchased and stored on the shelves of the practice, it is recorded in the balance sheet inventory asset account and when it is used or sold to a client, it is treated as an expense on the income statement. The inventory asset (the amount on the balance sheet) should represent the amount of product sitting on the practice’s shelves at a point in time. This figure is often used to calculate the accrual-based figure for the amount of product sold or used and if the balance sheet figure isn’t right than the figure representing used or sold product isn’t right.

 The balance sheet number is often not accurate because:

•  The inventory isn’t counted at the end of the year and so no one really knows how much is on the shelves
• The amount of inventory on hand from the Practice Information Management System (PIMS) inventory module is used for the balance sheet figure but the PIMS report isn’t correct
• The balance sheet figure is manipulated to show a more favorable tax position

 If the balance sheet figure isn’t right, the income statement figure isn’t right and if the expense isn’t right, the practice team doesn’t know if the costs are within normal limits. 

 So, what numbers does the practice need to really know if the inventory expense is reasonable? The practice needs an accrual basis revenue number and an accrual basis inventory expense figure. The accrual basis revenue figure is easily found in the PIMS. The accrual basis inventory expense figure can come from the financial statements if they are accrual basis and if they are accurate or the figure can be calculated each year using the following formula:

Inventory on shelves at the beginning of the year:    $ 75,000
Inventory purchases during the year:                           $150,000
Inventory on shelves at the end of the year:               ($65,000)
Inventory usage during the year:                                  $162,000        

The “inventory on the shelves” figures can come from the PIMS report or an actual physical count.

If using PIMS report figures, the practice needs to be sure that the figures equal what is actually on the shelves. Inventory purchase figures come from the accounting software.

The most common categories used to record purchases in the accounting system are: 

• Drugs & medical supplies expense
• Laboratory expense
• Medical waste disposal
• OTC product expense
• Dietary product expense

A relatively simple way to make the adjustment needed to accurately record an accrual basis inventory expense figure in the financial statements is as follows:

• Record purchases in the above accounts during the period desired (month, quarter, year)
• At the end of the period, count the inventory or retrieve the actual inventory on hand figure from the PIMS (assuming you are sure that number is right)
• Record the inventory on hand figure in the balance sheet inventory asset account with an offsetting credit in the appropriate inventory expense account (if there is already some amount in the inventory asset account, this amount should be adjusted to the current correct value with either an offsetting debit or credit to inventory expense)

Of course, getting the right figures is just the starting point. If you determine the costs are too high, you must then determine why and how to fix it. 

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Data review and commentary is provided by Karen E. Felsted, CPA, MS, DVM, CVPM, CVA of PantheraT Veterinary Management Consulting, www.PantheraT.com.