Inventory directly relates to the tax you pay. Though it’s important to manage inventory throughout the year, this is especially true at year end. Too much inventory sitting on your shelves, translates directly to higher profit and increased tax.
In my role as CPA and financial advisor to practice owners, I educate my clients to manage inventory like it’s money. That means looking at the numbers throughout the year, with extra scrutiny at year-end. Inventory on hand, for a typical small animal practice, should be around $15,000 for each FTE veterinarian working in the practice. Here are some things to consider to help reduce inventory:
- Postpone your next order till the new year, unless you have an urgent need, then order only what’s essential and you know you will use or sell immediately.
- Have a sale to clear out excess items.
- Clear out and trash any obsolete inventory (i.e. items that will never sell).
A note of caution, when calculating inventory; don’t rely solely on the initial inventory report printed from your practice software. Over the years I have seen reports that show over $1 million in inventory. These were from typical small animal practices with one or two doctors. What I discovered was that items were entered, but they were never relieved or adjusted. The moral here is, what goes in must come out!
To accurately track inventory in your software, enter only those items invoiced from the system. These items are typically drugs, diet, OTC and retail. Do not enter miscellaneous supplies you don’t directly invoice or charge for. Because supplies are continually used and replenished, tracking them is cumbersome. High-turnover supplies should be directly expensed when purchased.
If your practice’s inventory report is inaccurate, now is the time to work on it! Do a complete physical count of all invoice-able items. Adjust your software to the actual count for each item. In March, June and September, count 25% of your inventory and in December do a full count to ensure accuracy at year-end. In addition, monitor your inventory report monthly for reasonableness. Inaccuracies are easy to find and fix on an on-going basis.
If you follow these simple suggestions, you can proactively manage inventory throughout the year. You can also strategize to minimize inventory and your tax burden at year-end. An additional bonus is that you will make your accountant very happy!