We will be doing a three part series from our friends at SS&G. They are a CPA group representing over 200 independent pharmacies. Please see Annette Hoelzer's information at the bottom of this article for more information. Below you will learn about measuring the financial health of a pharmacy. This is great for current operators and those looking to buy a pharmacy.
Measuring Your Pharmacy’s Financial Health
As Peter Drucker, a well-known business scholar, so aptly stated, “If you can’t measure it, you can’t manage it.” Unfortunately, in today’s environment, it isn’t enough just to be a good pharmacist—you must also be a successful businessperson. The most successful independent pharmacies that we see don’t just run a business, they manage that business.
If you focus on two particular areas—profitability and cash flow-- you will likely experience better financial results. There are a number of key financial indicators that can help you monitor these areas, but to keep it simple, we will provide four statistics to monitor—two for each area. If you have not used statistics to monitor your business in the past, you should find that monitoring these four items faithfully each month and making adjustments based on the results should lead to improvements in your financial outcome.
Two financial indicators of profitability are the average prescription price and the gross profit margin.
Average prescription price can indicate whether you should consider making adjustments in your product mix (for example, adding certain over the counter items with higher margins, such as vitamins and generics, or specialty items). Even more important, it can indicate whether you have problems with proper pricing of items sold. A common mistake is neglecting to update prices in the system, or failure to change incorrect prices in the system. If you find that you have significant fluctuations in average prescription prices, these are areas that should be investigated. This factor is calculated by dividing your prescription sales by the total prescription count. (Industry average is $56.09)
Another profitability factor that should be monitored monthly is the gross profit margin. This indicator tells you how profitable you are on the sales you are making and how much of your sales dollars you have left to cover all other expenses. It can tell you whether you are encountering problems with inventory costs or whether you should consider adding more profitable offerings such as compounding and DME sales. This indicator is calculated by dividing gross profit by sales. (Industry average is 22.9%)
Both excess inventory and high receivables will prove to be a drain on your cash flow.
The first factor to look at in assessing cash flow is a calculation of accounts receivable as a percentage of sales. This factor indicates whether you have collection issues now or are moving toward future collection problems. A high percentage indicates a problem which should be addressed by more aggressively pursuing collection of receivables that are more than 60 days old. You also need to consider whether you are timely rebilling items as necessary. To calculate this factor, divide your accounts receivable balance at month-end by the amount of the sales for that month. (Typical range is 50%-70%)
The second cash flow indicator is inventory as a percentage of sales. This is calculated by dividing the inventory balance at the end of the month by the sales for the month. (Goal should be no more than 75%-100% of average monthly sales.) It is a strong indicator of whether you have excess inventory on hand. If this percentage is high, you should examine the inventory you have on hand to determine whether some items, especially high-ticket items, are moving too slowly and should be returned for a refund. You can also consider participating in exchanges to avoid holding excess items by buying only what you need and exchanging those you do not need.
We have addressed just a small sampling of the key indicators that will help you run a profitable pharmacy. For more informative explanations of these ratios and more, visit our website at http://www.ssandg.com/industries/pharmacies/pharmacies-resources/ to access our recent webinar on this subject.