Your COGS Is Talking. Are You Listening?

After payroll, cost of goods sold is the biggest check your practice writes. Every vaccine, every suture pack, every bag of renal diet, every reference lab panel. Most owners know their revenue to the dollar. Far fewer can tell me their COGS percentage, what’s in it, or whether it’s moving the wrong way.

Here’s why that matters. On a $2 million practice, every one percentage point of COGS is $20,000 a year. Running 26% instead of 22% is $80,000 that never reaches your bottom line. Same doctors. Same clients. Same hours.

Real talk: you don’t fix this by buying cheaper gauze. You fix it by knowing what your number is, what it should be for your hospital, and which lever is actually broken.

What COGS actually is

Cost of goods sold is the direct cost of the products and supplies you consume or sell to deliver care. If it walks out the door with a client or gets used up on a patient, it’s COGS. Rent, payroll, utilities, and marketing are not. Those are operating expenses.

The simplest way to calculate it for a period:

COGS = Beginning inventory + Purchases − Ending inventory

Start a quarter with $10,000 on the shelves, buy $5,000 more, end with $4,000, and your COGS for the quarter is $11,000. Then divide by revenue for the same period. That percentage is the number you manage.

One catch: that formula only works if your inventory counts are accurate. If your practice management software can’t print an inventory report you trust, your COGS number is a guess.

What’s in COGS (and what isn’t)

The AAHA/VMG Chart of Accounts is the industry standard for where every expense belongs, endorsed by the AVMA, VHMA, and VetPartners. Its “Direct Costs or Cost of Goods and Services” series, the 6000 accounts, is your COGS. Each cost account pairs with a revenue account, so you can see your margin category by category. If your P&L doesn’t have this section sitting right under revenue, ask your bookkeeper to build it this month.

Not COGS, per the same chart:

• All labor: doctors, technicians, groomers, kennel staff, and contract or mobile surgeons (7000–7175, 7085)
• Equipment over $500, which is capitalized and depreciated, plus equipment maintenance, service contracts, and repairs (7520–7570)
• Rent, utilities, janitorial service, office supplies, and marketing
• Credit card, CareCredit, and bank fees (7900 series)
• Discounts. They aren’t an expense at all. They’re recorded against revenue (5905), which shrinks revenue and pushes every expense percentage up

Two details trip practices up. First, the chart says to book internet pharmacy at gross: full sales as revenue (5130) and product cost as COGS (6130), even though the vendor deposits the net. Book it net and your COGS looks better than it is. Second, minor equipment under $500 lands in COGS; anything bigger is an asset. Before you compare yourself to any benchmark, make sure you’re coding the same way it did.

What the benchmarks actually say

Here’s the honest version: there is no single industry number. Depending on the source, the year, and what was counted, published targets for a small animal general practice land anywhere from about 18% to 28% of revenue.

Look at the gap between well-managed practices (22.8%) and the broader AAHA sample (28.0%) in the same year. That five-point spread is the opportunity. On a $2 million practice, it’s about $100,000 a year.

Here’s where I land: the goal is 22% or less. That’s where well-managed practices actually run: 22.8% in the 2015 benchmark study and 23.4% in the 2019 edition (broken out below). It’s below the 25% most rule-of-thumb charts settle for, and most general practices can get there without changing what they sell. Already under 22%? Keep pushing. Castner’s example hospital ran 20%.

Benchmarks by COGS category

The total hides where the money goes. Benchmarks 2019: A Study of Well-Managed Practices (2018 data) breaks spending out line by line. Here are the lines that count as COGS under the AAHA/VMG chart:

The study’s full “variable expenses” figure is 26.5%. The other 3.1 points are left out above: credit card fees (1.6%), sales and use tax (0.8%), vehicle and mileage (0.2%), and 0.1% each for collections, bad debt, client refunds, grooming supplies, and medical waste disposal.

Two takeaways. First, drugs and parasite products alone are 14.7 points, more than 60% of the total. That’s where pricing and purchasing pay off fastest. Second, hitting 22% means running 1.4 points leaner than these well-managed practices did. On a $2M practice, that’s $28,000 a year.

Find where your 22% is won or lost

A single blended number tells you whether you’re over 22%, not why. Jason Castner, CPA, CVA, who leads the veterinary consulting group at Lacher McDonald & Co., uses a method he calls “COGS Theory” to answer the why.

The idea. Every dollar of revenue carries its own built-in cost. An exam or a surgery is mostly your team’s time and skill, so very little of that fee is product. A bag of food is almost all product: you buy it, mark it up a little, and resell it. So COGS isn’t one number. It’s a blend, and the blend depends on what you sell.

Step 1: Know the typical COGS for each kind of revenue. Castner works backward from markup. If you buy food for $1.00 and sell it for $1.40 (a 40% markup), then $1.00 of every $1.40 in food revenue is cost. That’s 71%. Applying the same logic across the practice, his starting targets are:

If you know your own markups, use them instead. The math is simple: a segment’s COGS percentage equals 1 ÷ (1 + markup). A 100% markup means 50% COGS. A 60% markup means 62.5%.

Step 2: Pull your revenue mix off your P&L. What share of total revenue came from each segment last year?

Step 3: Multiply and add. For each segment, multiply its share of revenue by its typical COGS. Add the results. That’s the COGS your practice should run, given what you sell. Here’s an example hospital:

Read it row by row. Pharmacy is 22% of this hospital’s revenue, and about 40% of pharmacy revenue is cost, so pharmacy alone puts 8.8 points of COGS on the P&L. Food is only 8% of revenue, yet it adds 5.7 points. That’s more than double what exams, surgery, and treatments add, even though those are 43% of revenue.

Step 4: Compare your actual COGS to your expected COGS. This is where the method earns its keep. There are two very different stories:

• Actual is close to expected, but both are above 22%. Your number is high because of what you sell, not because of waste. Maybe food, pharmacy, or send-out lab is a big share of revenue. The fix is markup and mix decisions: price those products right, reconsider in-house versus reference lab, and grow professional services. Hunting for waste won’t move it much.
• Actual is well above expected. That gap is a leak. Say your mix says 22% and you’re running 25%. Those 3 points are $60,000 a year on a $2M practice, and they’re coming from fees that haven’t kept up, charges that never make the invoice, discounts, expired product, or shrinkage. The eight levers below are where to find it.

Mix moves the number on its own. Take the example hospital and shift 10 points of revenue from professional services to food. COGS jumps 6.6 points, to 28.6%, without a single vendor raising a price. That’s why you check mix before you blame your distributor.

Pull your mix off your P&L and run this math once a year, or whenever COGS jumps. It takes about 15 minutes.

Why COGS creeps up

When the percentage climbs, owners blame vendor price increases first. Sometimes that’s right. More often, it’s one of these:

• Fees didn’t keep up. Supplier costs rose and your prices didn’t.
• Stuff gets used but never charged. The fluids, the extra sedation, the second bandage change.
• Waste and expiration. Product bought, never sold, thrown out.
• Service mix shifted. More pharmacy and food, less professional service.
• Revenue leaked. Uncollected or discounted revenue makes every expense look bigger as a percentage, COGS included.

Eight ways to improve it

1. Fix pricing first. Ask yourself honestly: have fees gone up at least by the Consumer Price Index every year? Castner says pricing is likely the most impactful step most practices can take. And know that markup isn’t margin: double your cost (a 100% markup) and that item still runs 50% COGS.
2. Capture every charge. Audit records against invoices. Build treatment-plan templates and surgical and dental packages so consumables are charged by default, not by memory.
3. Discount on purpose. Not never. But every discount should tie to a goal you can name, like a wellness plan or a new-client offer.
4. Buy smarter. Price-shop your top-volume items, consolidate vendors where it earns better pricing, track rebates, and renegotiate long-term and lab contracts. Long-time suppliers can drift up quietly.
5. Run inventory like a profit center. Give one person ownership. For reference, well-managed practices in the 2019 study held about $61,200 of inventory on hand: $33,800 in drugs and medical supplies, $19,100 in parasite products, $8,200 in diets. Count accurately. Watch expirations. Track inventory turns (COGS divided by average inventory). Here too, published targets disagree: from 4–5 turns a year to 8–12. Pick a target and watch your own trend.
6. Track COGS by category, monthly. A stable overall number can hide one bad category. If pharmacy revenue grows 8% while pharmacy cost grows 15%, you have a problem the total won’t show you.
7. Standardize protocols. When every doctor uses the same anesthesia and surgical setups, usage is predictable, ordering is simpler, and waste drops.
8. Run the real numbers on in-house vs. send-out lab. In-house can cut reference lab spend at high volume. It can also add equipment cost. Decide with your volumes, not the rep’s.

Why this matters even more at exit

Buyers look hard at COGS. I’ve sat on both sides of a practice sale, and I can tell you: a buyer sees high COGS as profit they’ll capture after closing. That’s value they’d rather not pay you for.

Every dollar of COGS you save is a dollar of EBITDA. Buyers value practices on EBITDA multiples. So the $80,000 you recover going from 26% to 22% isn’t just $80,000 a year. It’s $80,000 times whatever multiple a buyer pays. Fix it now, while you still own the upside.

Start here this week

1. Find the COGS section on your P&L. If it isn’t there, get it built.
2. Calculate your COGS percentage for the last 12 months.
3. Compare it to the 22% goal, then run the segment math to see which categories push you over.
4. Find the biggest gap and pick the one lever that fixes it.

Independent practices don’t win against consolidators by working more hours. They win by knowing their numbers better than the people trying to buy them. COGS is one of the first numbers I look at with every practice I coach.

Sources

• Benchmarks 2019: A Study of Well-Managed Practices (WMPB 2019), Chapter 3, “Minding What You Spend” (2018 data).
• AAHA and VMG. AAHA/VMG Companion Animal Chart of Accounts Field Definitions, July 2020 version.
• Jason Castner, CPA, CVA. At All Costs, Know Your COGS. Today’s Veterinary Business, April–May 2025.
• Bill Murray. Understanding COGS in a veterinary hospital. dvm360, November 2024.
• Beth Scott and Ali Todd, KSM. Know Your Numbers: What Your Veterinary Hospital’s Cost of Goods Sold Is Telling You. August 28, 2026.
• Glen Sellers, MS, MBA. Profitability of Mix Rural Practices. Auburn University CVM, 2018 (citing Benchmarks 2015 and AAHA 2015).
• VIN commentary on veterinary practice economics by the former director of the AVMA Veterinary Economics Division (2013–2018).
• AAHA/AVMA Financial Standardization booklet.
• Picking the right ratios for your clinic. dvm360.
• High Cost of Goods. Insight Equine (Patterson Veterinary), September 2018.
• Veterinary inventory management: the guide. Lupa Pets.
• Inventory turn targets: ezyVet (8–12), Vetsource (5–8), dvm360, 2008 (4–5 industry average).