Before diving into inventory management strategies, it’s essential to understand what Cost of Goods Sold (COGS) truly represents. Trying to reduce COGS without understanding how it’s calculated is a fast path to frustration, misdiagnosis of problems, and poor decision-making.
COGS represents the total direct cost of the items that generated revenue for your practice within a given period. For example, if a vaccine produced $40 in revenue and cost the practice $5 to purchase, the COGS for that item is $5. When expressed as a percentage of revenue, that same example equals 12.5% COGS ($5 ÷ $40). Evaluating COGS as a percentage is helpful because it allows for benchmarking, trend analysis, and comparisons across practices.
To support consistent financial categorization, practices rely on a chart of accounts, which organizes revenue and expense categories in a way that supports analysis. The AAHA Chart of Accounts provides widely accepted definitions for revenue and cost categories, making it easier to compare performance and spot operational opportunities.
Examples include:
Broad Revenue Categories
Professional Services Revenue
Lab Revenue
Pharmacy Revenue
More Specific Sub-Categories
Professional Services Revenue
Exam Revenue
Vaccine Revenue
Injections
Lab Revenue
In-House Lab
Reference Lab
Pharmacy Revenue
Prescriptions
These distinctions matter because different revenue categories carry different cost structures and profit margins — and should be managed with different strategies.
Certain expenses — such as labor or merchant fees — are not included in COGS but remain important to track for managerial and benchmarking reasons. One common challenge is online pharmacy data: many third-party vendors remit only net revenue rather than reporting true COGS. To maintain accuracy, request and upload full statements regularly into your accounting system.
By grounding inventory decisions in an accurate understanding of COGS, practices can better identify root causes of high expenses, evaluate profitability by category, and ensure financial decisions are aligned with operational reality.
