Our latest thoughts and inspirations on buying a pharmacy, starting a pharmacy, and ongoing pharmacy operations

Where did my pharmacy’s cash go?

One of the struggles of every entrepreneur is understanding the difference between profits and cash. Articles on this subject are within every entrepreneur and business blog and pharmacy is no different.

Good news is, within pharmacy cash drain is typically in two areas, payroll and inventory. Yes, we know, we know DIR Fees, lowered reimbursement etc. That is what we hear but unfortunately there is little you can do to control these. So what can we control? We find 98% of the time payroll and/or inventory has inflated. The reason for this, inventory and payroll make up 85-90% of a pharmacies expenditures. Let’s look at each a little closer.

Inventory

We see two primary cash drains within inventory. First, having too much on your shelf. To simplify this let’s say in a month you make a profit of $20,000 but order $30,000 in excess inventory. In this scenario you did not make $20,000 you were $10,000 cash flow negative. Second, is purchasing incorrectly, we see so many owners not using secondary’s, allowing their perpetual inventory to auto order without reviewing if a cheaper alternative exists and over purchasing from secondary’s impacting rebates and brand pricing. In our opinion every owner should make inventory one of his or her priorities daily.

Payroll

Labor makes up at least 10% of your expenses. No other expense is over 1% in most pharmacies and as such can be a primary source of cash deficits. In a traditional pharmacy the target payroll is 10% of sales. For a pharmacy with sales of $3 million a 1% excess is a $30,000 cash drain, 2% is $60,000 and were not even including taxes or other benefits like 401k match. It is easy to overlook excess labor costs as on a 2 week payroll basis it is only a small amount but over the course of a year it will take your cash!
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What are the key pharmacy accounting and financial metrics?

It is easy to be distracted from the core procedures and processes that drive our businesses. Distractions occur every day, from customer issues, new opportunities, to personal obligations. So how do we stay focused? One way is to track and measure key metrics that impact your business, but what are these? We believe in 3 core areas to focus, below we outline these along with metrics to follow. Hopefully this helps you manage your business without surprises!

1.       Revenue

·         Script Count – compare 2 week periods

·         Sales Revenue – compare in 4 week periods

·         Revenue/script – review monthly

·         Total Patients – compare in 4 week periods

·         Lost Patients – review monthly

·         Transferred Patients – review weekly

·         Revenue per payer – review monthly

2.       Cost of Goods Sold/Inventory

·         Gross Margin Dollars – review monthly

·         Gross Margin % - review monthly

·         Gross Profit/Script – review monthly

·         Deposits vs Purchases – these are real dollars spent – review monthly

·         Slow Mover Report (inventory not used for 100 days) – review monthly

·         Total Inventory – review monthly

·         Margin per payer – review monthly

3.       Payroll

·         Labor dollars per script – compare every 2 weeks

·         Labor dollars as a % of sales – compare every 2 weeks

·         Overtime – review amount every 2 weeks
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