Understanding the pharmacy’s financials is critical to measuring the health and progress of the business and the efficiency of its financial management. The pharmacist/owner can use the businesses’ key performance indicators (described in a separate monograph) and benchmark their values against other pharmacies of like size and characteristics. According to Steve LeFever, founder and chairman of Business Resource Services and developer of the Profit Mastery program, has written that there are seven steps to business success:
- Proper planning
- Monitoring financial position
- Understanding the relationship between price, volume, and costs
- Managing cash flow
- Managing growth
- Borrowing properly
- Planning for transition
LeFever suggests using these steps as a “performance” checklist several times a year. He also cautions leaving “scorekeeping” to your accountant since it is the pharmacist/owner who is at risk with the bank. He also suggests that financial priorities be cash flow, net profits, and sales. LeFever notes that a rolling 12-month cash flow projection is not only a critical planning tool, but also a document that banks will be scrutinize. He encourages owners to avoid the mistake of trying to increase cash flow through increased sales, which often results in the need for more assets and capital to pay for them and can lead to inefficient use of capital.
A pharmacy uses its assets to generate revenue through sales, while operating to minimize costs in order to maximize profit. There needs to be enough revenue to pay the owner, pay off liabilities, and purchase new assets so the business can grow. Using the two basic financial statements, the balance sheet and income statement (or profit and loss statement) are necessary to monitor this process.
The balance sheet provides a snapshot of the pharmacy at a given time, showing its assets, liabilities, and net worth. The income statement provides a summary of the pharmacy’s sales, expenses, and profit for a given time period. These statements provide the basis to analyze the pharmacy’s cash flow, financial position, productivity, and profitability as outlined in the monograph on Key Performance Indicators.
If profitability indicators are off, for example gross margin, it may mean the pharmacy is not negotiating adequately with third parties for reimbursement or is paying too much for inventory. If the gross margin is in line with other like pharmacies, then a thorough look at expenses may be in order. Looking at net worth and sales to assets ratios can identify whether the pharmacy is efficiently using its assets. If the indicators are off, then the pharmacy may consider selling non-productive assets or financing the purchase of more productive assets.
The current and quick ratios are cash flow indicators that need to be monitored to determine the time of cash paid in and out by the pharmacy. The quick ratio provides a good picture of how quickly the pharmacy can pay off its current liabilities since it excludes longer-term assets, such as inventory. Many pharmacies’s offer credit to customers to build loyalty but such programs need to be carefully managed. High accounts receivable collection days means dollars that are tied up and can’t be used to buy inventory or pay other expenses. From an expense standpoint, inventory is the most significant investment by any pharmacy representing 30% to 50% of its assets. Front-end and prescription inventory ratios provide a guide to whether inventory/cash are in balance.
Monitoring the pharmacy’s key performance indicators calculated from its financial statements and comparing them to other pharmacies of like size and characteristics can help identify areas of opportunity and improvement. A very good benchmarking tool is the annual National Community Pharmacists Association (NCPA) Digest. The Digest is a summary of selected financial and demographic information that illustrates the value community pharmacies provide to their patients by maximizing medication effectiveness. It is the most comprehensive report on independent community pharmacies available. The Digest is available to NCPA members free of charge at www.ncpanet.org under the “members only” area. There is a small fee for non-members.
The Digest allows comparison on key performance indicators by top 25% of performers, by all pharmacies, by annual pharmacy sales, and by population size of the community. Standard minimum ranges identified by NCPA based on a 2009 analysis of five-years of data follow. Data was calculated for 2004-2009, excluded any pharmacies with negative profits, and calculated at the tenth percentile for each metric.