Determine Quantity on Hand Amounts and Reorder Points

Inventory Management System

“Quantity on hand” refers to the minimum quantity for an inventory item to be stocked on the shelf so that you won’t run out before the next order.  Many practices never establish actual numbers for the quantity to keep on hand and manage inventory by what seems appropriate without establishing a system.  This can result in inefficiency and high inventory expenses.

To establish minimum quantity on-hand amounts for each inventory item consider how much product you need so that you don’t run out of supplies but also don’t keep too much product on the shelf.  To determine the appropriate amounts for your practice look at the quantities used in a 30-60 day time period or less.  If you notice that some products stay on the shelf for several months, then you have an opportunity to reduce inventory and spending.

Quick inventory turnover minimizes overstocking and helps keep costs down.  The practice management software should be able to generate reports which detail the monthly usage of drugs and supplies.  Adjust the quantities to keep on hand seasonally for some products such as flea and tick preventives.

Establishing re-order points for each inventory items is time-consuming but well worth the time spent initially to improve efficiency and cost-savings long-term.  The re-order point is reached once the quantity on hand drops to a point where the hospital may run out of the item if an order is not placed.  For example, perhaps your quantity on hand amount for intravenous fluids is four cases.  You may set the re-order point at 3 cases of fluids which means once you are down to 3 cases; you will order an additional case of fluids.  Here’s another example: the quantity on hand for 68mg Baytril might be 1Ž2 bottle and if you see the quantity dip below this amount, you place an order for another bottle.

Implementing An Effective Veterinary Inventory Management System

Every practice needs to have a designated veterinary inventory manager who is responsible for inventory control.  Often this individual is a veterinary technician since they are familiar with hospital drugs and medical supplies.  A good inventory manager is detail-oriented and committed to saving the practice money.  The inventory manager should work with the practice manager or owner to be sure inventory costs are kept in line with budgets and industry benchmarks.

Every hospital also needs a well-organized veterinary inventory management system in place to manage inventory.  Some practices find using a computerized inventory system helps to better track products and their usage.  Regardless of whether you use your practice management software or a visual inventory system, determine appropriate quantities to have on the shelf, establish reorder points and reorder quantities for all inventory items and set a schedule for ordering.

If the inventory manager does an inventory count and orders on a regular schedule, the practice is unlikely to run out of products.  Establishing a set day of the week and frequency to place orders also improves efficiency since the inventory manager can allocate specific, defined hours to inventory management.  Usually, orders are placed once or twice weekly (often online) with major distributors to minimize quantities on the shelf and to increase turnover times.  Check expiration dates every week or two when placing orders so you can make arrangements to return product if necessary.

Keep Inventory Prices Updated

Establish price markups in your practice management software for inventory items.  Target markups for most drugs are 140-175 percent of the cost of the medication including sales tax and shipping and 100 percent for heartworm and flea control products.  To compete with online pharmacies, some practices have lowered markups for select products closer to a 50 percent markup.

Set up a protocol for unpacking incoming inventory items and processing inventory invoices.  Place invoices in a designated location for entry into the computer software system.  Assign one or two employees to enter inventory purchases and prices in the computer every week or two to ensure that fees for inventory items are updated as price increases occur.

Buying a Practice? Your History and Clinics Are Key

Lenders take a hard look at personal credit scores and debts, a business’ cash flow and the asking price.

In today’s market, many veterinarians consider practice ownership an avenue to securing their financial future. There is security in being the boss, dictating medical protocols and having the long-term opportunity to be rewarded for your hard work and time. Often, the key question is not whether to own a practice, but instead how to accomplish the goal.

Lenders will ask some key questions as they consider financing a practice acquisition. A lender will review seven primary items related to the individual borrower as well as the practice. They are personal credit score, personal debt obligations, personal liquidity, business and personal collateral, experience, business cash flow, and whether the purchase price is supported by standard business valuations.

Credit Score and Debt Obligations

These individual factors are not influenced by the practice targeted for purchase. Potential practice owners can start to build these pieces of their resumes while still in veterinary school. The credit score is driven by several key items. The one that everyone is aware of is the history of payments on personal obligations. Any missed payments will reduce a score and decrease loan options. One missed payment will not restrict a veterinarian from purchasing a practice, but a history of missed payments will result in financing challenges.

A lender also will review overall personal obligations. The higher your monthly obligations, the more salary you will need to draw from the practice. In general, student loans will not restrict practice ownership; as with well-managed installment accounts, these are important to building strong credit. The opposite side of the credit report is revolving debt, such as credit cards. We have seen scenarios where borrowers have not missed any payments, but have large amounts of revolving debt or have utilized revolving limits to their maximum. These factors will result in a lower credit score.

Most lenders use a formula—often a 50 percent debt-to-income ratio—to determine your personal salary requirements. This ratio means that if you have $3,000 a month in obligations, you will need $6,000 in salary to cover these obligations, or an annual salary of $72,000. If personal monthly obligations increase to $6,000 a month, an annual salary of $144,000 is required to maintain the 50 percent debt-to-income ratio. A lower personal salary requirement will allow more opportunities to purchase a practice.

Personal Liquidity

The lender and borrower are entering into a partnership. The bank is providing the financing and the veterinarian is going to be the onsite management. Most lenders like to see the borrower have a financial interest in the business partnership. This is generally known as equity, which comes into the transaction via the borrowers’ personal liquidity.

In general, the veterinary industry has very low equity or personal liquidity requirements—often less than 5 percent of the total project. As the borrower equity requirement gets lower, it should be offset by a seller held-back note. In this situation, the seller will be a creditor on the transaction and will have a security interest in the assets being financed. If you want to be a practice owner, it is always best to build a cash reserve. This may mean that if you have a lower interest rate on your student debt, don’t retire the obligations early. Generally, lenders are not able to recognize the early debt retirement as equity, even though there is a great investment and value in your professional degree.


Veterinary niche lenders understand that the only collateral available for the practice’s asset and real estate purchase may be the real estate, or you may be purchasing the practice and have no real estate to pledge as collateral. Banks will review personal financial statements for additional collateral, but that is certainly not a requirement to secure financing.

Banks have general recovery rates on different assets that they will receive should the loan default. When these rates are applied to collateral on veterinary loans, a shortfall typically occurs. However, this has not been a restriction for veterinarians in securing financing. Niche lenders understand your business and understand the value in your degree as a doctor of veterinary medicine.

Business Cash Flow

A business’ cash flow is critical for both the bank and the purchasing veterinarian to understand. The cash flow drives the debt coverage ratio. This is the ratio of cash you have available to service the debt obligations once you have subtracted your required officer compensation. In calculating cash flow, you are determining the cash available to you, as an owner, after you have paid all your salaries, operating costs and fixed costs.

The cash flow number generally includes the following adjustments and add backs to the net income on the tax return:

Q Depreciation and amortization.

Q Rent. (If the building will be owned by the borrower, you will want to adjust for taxes and insurance.)

Q Interest. (Interest will be recognized in payment and would be double-counted.)

You also will add back the officer compensation and then make a reduction to cash flow for the actual salary the owning DVM will require. This will give you the cash to service the proposed annual debt obligation. If you divide the cash flow number by the annual debt service obligation, you will have computed the debt coverage ratio. Typically, lenders are looking to see a number of 1.25 or greater. This can be deceiving, though, and needs to be reviewed.

A practice with a lower annual debt service obligation can meet the debt coverage requirement. However, it may not truly have sufficient excess cash available to provide an ample safety net for the owner. For owners, it is imperative to understand the cushion you have available. It also is important to understand how the current owner is accomplishing this number, as this is what drives the price you are paying for the practice. It will be important that, as an owner, you feel comfortable in being able to replicate this type of performance.

Practice Valuations

Lenders are not licensed appraisers, nor do they provide you with a valuation of the real estate or practice you are purchasing. However, the purchase price of these assets is very important to lenders, as they want to review the overall deal to ensure that the practice can support the proposed obligations. Each lender has specific criteria he is comfortable lending against.

Often, a lender will provide financing up to a certain amount of the gross revenues or will lend based solely upon the debt coverage ratio. The main driver of value for the veterinary practice’s assets is cash flow; therefore, as a borrower, you need to understand how the historical cash flow is being accomplished. If you are comfortable in how the cash flow is being attained, the next step is to find a lender that will work with you.

Remember that many different avenues are available to finance your practice ownership dream. With a strong understanding of the key factors lenders consider, you can pick the loan product that will be the best tool to help you accomplish your goals.

Vince Dailey is a senior loan officer in the Atlanta office of Live Oak Bank, where he is responsible for examining, evaluating and recommending the approval of commercial customer applications for extensions of credit. Before joining Live Oak Bank, Dailey was the president for Vine Street Financial, a division of BB&T, and worked as an SBA loan packager for Thomas Financial Group as well.

This Education Series article was underwritten by Live Oak Bank of Wilmington, N.C.

To download a copy of this article, click here: Buying a New Practice? Your History and Clinic’s Are Key