Operating a successful independent community pharmacy business requires crafting a business strategy with short and long-term goals and managing a set of key metrics to achieve them. Basic metrics may be categorized by profitability, productivity, financial position, and cash flow. Other key metrics will vary depending on what the business is trying to achieve. For example, perhaps the pharmacist/owner has instituted a new pharmacy workflow management system integrated with a point-of-sale system at checkout. A goal related to this decision may be to provide faster check out for customers as well as capture purchase patterns for a new loyalty program. Metrics that the pharmacist/owner might wish to measure could include the average time is takes to process a transaction at the check out area.
Profitability measures center around gross profits, net profits and expense control. They measure the efficiency in generating profits from sales. Key metrics in profitability include:
- Sales compared to the year before or another prior time frame
- Sales compared to a strategic goal
- Gross profit dollars = Sales-Cost of goods sold
- Gross profit margin = Gross profit dollars/sales * 100
- Net operating income percentage (%) = Net profit before tax/sales
- Net operating income dollars before tax
Savings through managing cost of goods sold contribute directly to the bottom line as increased net profits. Other opportunities for increased profitability come from controlling payroll expenses, operating expenses, and interest expense. Expense controls improve profitability, so expenses and groups of expenses are also monitored. For pharmacy, looking at profitability by business segment, such as Medicaid, Medicare Part D, other third-party, cash can help determine any decline by segment and point to the need to institute plans to build more profitable segments.
Productivity measures include the relationship of sales to physical facilities and staff, and how efficiently they are managed. They may also include measure related to customer transaction size or the ability to convert a customer’s visit to the pharmacy to a sale.
- Total sales per square foot of store space = Total sales/store square feet
- Prescription sales per square foot of pharmacy space = Prescription sales/prescription dept. square feet
- All other sales per square foot of store space = All other sales/store square feet (not including prescription dept.)
- Sales per employee = Sales/# employees including pharmacy owner
- Staff costs per employee = Non-owner wage, tax, benefits/#employees not including owners
- Sales per labor hour, selling hours only = Total store sales/selling hours used
- Employee sales/hour = Individual employee sales/total hours worked by that employee
- Sales per labor hour, all payroll hours = Total Store Sales/total hours used
- Average sale per customer or average sale per transaction = Sales/# of customers (or transactions)
- Units per customer or units per transaction = Total # of units sold/total # of transactions
- Conversion rate = Total # of transactions/total # of customers entering the pharmacy
These measures help the pharmacist/owner determine if the staffing levels are reasonable for the pharmacy’s sales volume. Controlling payroll expenses represents a key area of financial efficiency. Optimum productivity is the result of efficiency in payroll expense control, balanced with effectiveness of staff ’s efforts. Staff cost per employee or as a percentage of sales are benchmarks for measuring cost efficiency. Sales per employee is a benchmark for measuring the effectiveness of staff efforts. Breaking it down by selling vs non-selling hours can help the pharmacist/owner learn the balance of sales and administrative hours. Additionally, sales per square foot can help point to the need for expansion or a change in the pharmacy’s space depending on the pharmacy’s strategic goals. Sales per customer or the conversion rate are indicators of how efficiently the pharmacy’s promotional or sales efforts are performing.
Financial position measures show the efficiency of the pharmacy in generating sales and profits from the owner’s investment in assets.
- Sales to assets = Sales/total assets
- Return on investment = Net operating income dollars/net worth
- Debt to worth = Total liabilities/net worth
In the pharmacy, key assets include the businesses’ cash and cash equivalents, its accounts receivable, the inventory, and other current and fixed assets. Efficiency of asset use can be measured by comparing sales to assets. The return on investment ratios measure how efficiently the company generates profit from the pharmacist/owners’ investment. Debt management is measured by the debt to worth ratio.
Cash flow measures reflect how well the pharmacist/owner is managing the uses of cash and liquid assets in the ongoing operations of the business. Cash flow management is critical in order to support business growth and ongoing operations. If the business grows to rapidly without attention to cash flow, trouble can result when there is not enough resource to cover accounts payable from increased inventory needed. Common cash flow ratios include the following:
- Current ratio = Current assets/current liabilities
- Quick ratio = Cash + accounts receivable/current liabilities
- Inventory turnover annual = Cost of goods sold/inventory
- Inventory turnover days = 365/inventory turnover
- Prescription inventory turnover = Prescription cost of goods sold/prescription inventory
- Prescription inventory turnover days = 365/prescription inventory turnover
- Accounts receivable turnover annual = Credit sales/accounts receivable
- Accounts receivable collection days = 365/accounts receivable turnover
- Accounts payable turnover annual = Cost of goods sold/accounts payable
- Accounts payable turnover days = 365/accounts payable turnover
Inventory, accounts receivable, and accounts payable problems are controllable, and management efficiencies in these areas can be measured. The common benchmarks for measuring these efficiencies are inventory turnover and turn days, accounts receivable turnover and turn days, and accounts payable turnover and turn days. The liquidity or short-term solvency of the business is measured by the current and quick ratios.
In managing purchases, payroll and operating expenses in the pharmacy, some rules of thumb are recommended to avoid cash flow issues. Prescription inventory is generally among the largest expenditure the pharmacy incurs. It should be budgeted based on sales and the gross profit percent of past sales [Sales per month* (1-gross profit percent in decimal format) = Sales target]. For example, let’s say the pharmacy’s prescription sales are $200,000 per month and the business segment sales mix provides a 24% gross profit percent, then prescription purchases should be budgeted at the following:
$200,000 * (1-.24) = $152,000
Payroll expenses as a percent of total sales should not exceed 15% while total operating expenses should not exceed 7% based on industry benchmarks.