Financial considerations critical component to successful merchandising


For years, a debate has raged about the merits of merchandising in the veterinary practice setting.setting.setting. The debate has been as much a philosophical one as anything else. Veterinary professionals must reconcile aspects of marketing in competitive retailing with prescribed ethics of professional conduct and appearance.

Retailing to one extent or another, seems to be a fact of today's veterinary practice. Beyond the more complex and intangible philosophical challenges, administrators must attend to important financial and management considerations inherent in merchandising.

The debate Merchandising by its very definition refers to the buying and sales of tangible personal property: goods and commodities. In the context of the veterinary hospital, merchandising refers to nearly everything that is not professional services: dietary products and supplements, drugs and prescribed medications, parasite control products both for pets and environment, and the myriad of ancillary supplies that could be found at any retailing establishment formed for the purposes of animal care supplies. In veterinary hospitals, such ancillary products could span from collars and leashes to behavior enhancement equipment, such as Kong toys and Gentle Leaders.

Today's veterinary practices generally take a holistic approach. In the course of physical examination and wellness care, health and other animal-care related issues come to light, resulting in a doctor or technician's recommendation. If that recommendation entails the provision of a certain medication or nutritional supplement, the course is clear. Having the recommended goods on hand is a convenience to the client and results in better compliance. Hasn't every veterinarian felt the relief of being able to provide the client with exactly what they need at the time of the office call? Isn't it psychologically easier to charge for professional time when the client leaves the building with some tangible item in a doggie bag?

Think again. How often have staff anxiety levels increased when the recommended product is discovered not in stock? Or the times when patients did not like the dog food that must now be returned. Worse yet is the discovery months later of unreturned products tucked away in a corner, now expired and without chance of refund.

Here to stay Merchandising in the veterinary practice is probably here to stay, despite potential pitfalls. Surveys suggest that one-stop shopping and convenience is a significant factor for client loyalty. Additionally, veterinarian comfort levels with charging a fair fee for diagnosis, physical examinations and surgery time seems less than when a medication is dispensed.

Merchandising can be an expensive proposition. The cost not only exists in the original purchase of the item for resale, but also in building enough floor space and adequate storage areas to house it, and investing in the staff to order, manage and move it.

Given the veterinary profession's use of merchandise as support to professional service provision, what are the significant financial issues to be considered?

Tax consequences The United States tax code provides that certain service-based businesses may maintain books and records on a modified cash basis. Revenue notice (2001-76) is the most recent addition to a long list of rules affecting a business's choice of accounting method. This most recent rule amendment suggests a cash-receipt method of accounting is allowed for many businesses of $10 million or less in gross revenues.

Reading the tax code and interpreting the various procedural pronouncements that have come in recent years is a challenging proposition. Nevertheless, cumulative guidance provides that materials, supplies and retail items cannot be expensed at the point they are purchased, as would occur on a pure cash methodology.

Supply and retail inventories must be "capitalized", that is maintained as a financial asset of the business and not expensed until actually depleted in the course of providing services or sold to a client. Veterinary practices must track the value of supplies and merchandise so that expenses are not prematurely deducted.

A logical solution is voluntary election of the accrual basis of accounting for practices selling any quantities of drugs, supplies or ancillary animal-related products. Under a full accrual basis, inventories are capitalized, just as required on the modified cash basis, but the practice also recognizes liability for amounts owed to outside parties.

Accrual-based accounting records clearly state inventory valuations, accounts payable, and other assets and liabilities. From a financial management perspective, results of operations are easier and more meaningful in their interpretation, while the off-balance sheet accounts are minimized.

Sales and use tax Another merchandise compliance issue is that of sales tax payments, collection and remittance. Each state has different rules. Be aware of current legislation and its interpretation in regard to your veterinary practice.

In some states, a veterinary hospital is deemed the end user of products purchased for use in the treatment of animals. Drugs, whether used during pet hospitalization or prescribed to clients, may be tax-free to the client when invoiced. If so, the practice must pay sales tax on purchases made from its vendors.

In other states, sales tax is not assessed to the veterinary practice by the vendor. The practice may be required to charge sales tax after appropriate markup on products. When sales tax is collected from clients, it must be remitted on a regular basis to the state.

Practices must be aware of use tax laws. Every state that has a sales tax also has a compensatory tax, called use tax. When the practice has not paid the required sales tax to the vendor, such as with some out-of-state purchases, then it must compute and remit the correct amount of tax to the state.

The state dictates sales and use tax return filing requirements and dates. Practices must voluntarily comply with the regulations. Sales and use tax audits are common, easy sources of revenues based on current statutes for most states.