Summary: Revenue tells only part of your veterinary hospital’s financial story. Monitoring cost of goods sold (COGS) as a percentage of revenue can help veterinary practice owners identify profitability issues, improve operational efficiency, and make smarter financial decisions.

In our last article, we discussed how revenue tells the story of your veterinary hospital’s growth. But revenue is only part of the equation. Every practice owner should also ask, “How much did it cost us to generate that revenue?”

One important piece of that answer is cost of goods sold (COGS), also known as direct costs.

Direct costs include drugs, medical supplies, laboratory fees, prescription diets, and other products used to provide patient care. As your hospital grows, these expenses should grow as well, but they shouldn’t outpace the revenue they generate. When they do, profitability begins to erode.

Measure Direct Costs as a Percentage of Revenue

Rather than focusing on dollars spent, focus on spending efficiency.

Instead of asking why your hospital spent more on drugs this month, ask whether your direct costs increased at the same rate as the revenue they generated.

Tracking direct costs as a percentage of revenue over time provides far more insight than reviewing expense dollars alone. For example, if pharmacy revenue increases 8% but pharmacy costs increase 15%, it’s worth investigating.

Why Your COGS Percentage May Be Increasing

When your COGS percentage starts climbing, don’t assume vendor prices are the only cause. Several factors should be considered:

• Rising supplier costs without corresponding fee adjustments
• Inventory being wasted or expiring
• Products being used without being charged to clients
• A shift in service mix

Breaking direct costs into categories – such as pharmacy, laboratory, diets, retail products, and medical supplies – can help pinpoint where margin pressure exists. A single category may be reducing profitability even if your overall COGS percentage appears stable.

How To Manage Direct Costs More Effectively

Monitoring COGS helps protect margins while supporting high-quality patient care.

Start by reviewing direct costs regularly, monitoring trends, investigating unexpected changes, and adjusting your pricing and operations as needed. Your financial statements won’t tell you exactly what to do, but they will tell you where to start looking. Practices that consistently monitor these trends identify problems sooner, make better decisions, and ultimately keep more of every dollar they earn.

This is the second article in our Know Your Numbers series, highlighting the financial metrics that matter most for veterinary hospital owners. Not sure what your numbers are telling you? KSM’s veterinary consulting team can help you interpret your data and develop strategies for long-term profitability.

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