‘Keeping your finger on the pulse’ —A fairly broad and widely used idiom in the business world, but what does it mean exactly for today’s pharmacy owners?
We are now firmly in the era of data. Pharmacy owners now have the ability to access large quantities of financial information about their business and, indeed, the wider competition.
Whether owners like it or not, by not embracing technology they are gifting an advantage to their competitors.
As a current or future owner, it is imperative that you are constantly monitoring the key performance indicators (KPIs) which create the heartbeat of your business.
By acknowledging and assessing the drivers of a profitable pharmacy, owners can look to create an advantage over the competition.
Technology and the ‘reporting framework’
With the impact of technology on the pharmacy landscape, owners can get accurate and timely information about performance without the high costs historically attached. The introduction of cloud-based accounting solutions and various real-time reporting technologies has seen more financial information than ever at the fingertips of every owner.
Just why is this important?
Consider the simple example of reviewing annual financial statements prepared after the fact, against accurate and current monthly data about your pharmacy. What would you like to be basing your decisions on?
Whilst it is a daunting adventure integrating technology into existing business procedures, by getting it right, owners can make light work out of heavy data inputs. It begins with your pharmacy data and the key metrics that impact financial success.
Then, by utilising cloud-based accounting solutions, you can combine the fiscal performance with non-financial data to create real-time reporting dashboards for things that impact the profit of your pharmacy and ultimately the cash in your bank pocket.
By putting these elements together, each and every pharmacy owner can create their own Reporting Framework to be used in driving their business forward and work towards good pharmacy management.
Fundamentals of good pharmacy management
There are many different reporting metrics that can be used to measure the financial performance of a pharmacy — some radical and some not so. It is important to consider each individual pharmacy and the particular drivers that impact performance. If your retail offering is not a key driver of profitability — say, a compounding pharmacy — preparing and tracking retail metrics may not be appropriate. Always consider the key levers of your business.
In saying that, here are some key measures that do impact most pharmacies:
Your Revenue Streams
Revenue is the lifeblood of your pharmacy and without it your business would cease to exist. What is particularly important here is knowing the individual performance of the different cost centres in your pharmacy and what drives them. This begins with separating the contribution from dispensary, retail, compounding, professional services and any other product lines in your pharmacy.
If we consider the reporting framework mentioned previously, by separating these items of revenue, owners can very quickly and clearly identify areas of concern for the pharmacy. As a result, focused action can be taken in the event of continued trends of declining performance or even replicate areas that are performing well. Always consider your key primary drivers being customer and script numbers, and make sure they are heading in the right direction.
Gross Margin and the Professional Services Contribution
Gross margin is a concept many owners are familiar with but, in short, it is effectively a function of your sales less direct purchases of the product. As a broad comment, margins are in fact shrinking across the industry, so this measure is more important than ever before.
Whilst the concept of gross margin is not a foreign one, there are some interesting and thought-provoking questions that pharmacists often consider when looking at their own business, such as:
What are our highest grossing and fastest moving products? Are these products given the appropriate shelf space and marketing material?
- How do we compare to similar pharmacies? Are we pricing products to gain a greater market share and consistent with the overall strategy?
- Am I getting a contribution from professional services? Many pharmacists combat the reductions in margin with strategies which contribute to this revenue, often without a margin attached. Without identifying this contribution, are our strategies even successful?
Net Profitability and Managing Business Overheads
Any pharmacy’s net profit is a good indication of the above metrics in addition to how well overheads are controlled. Let’s consider the two common drivers of profit: wages and rent.
A key driver to a pharmacy’s profits is inevitably wages paid to staff with the nirvana position being an engaged and efficient workforce. A good measure of workforce costs is total wages as a function of gross profit plus professional services income. By measuring this, we can track the efficiency of the workforce and whether the business is appropriately supported by the right level of staff.
It is probably fair to say that once your lease is signed, rent is something that you cannot materially change. What you can change is the use of the space available. Consider your stock intensity or mathematically speaking, your stock value per square metre. This measure considers how full your shelves are with the intention of creating retail excitement. Are your customers seeing half-empty shelves or unable to find the product they are after and choosing to shop elsewhere?
Finding the right balance
There is a plethora of formulas and metrics used in measuring profitability which many owners find overwhelming. Working with your accountant can help identify the key drivers for your pharmacy and assist in building your reporting framework. By using the right technology, you can ensure decisions are based on accurate and understandable data which will enable you to create a financially successful pharmacy.
For more information
If you need further assistance regarding any of the content discussed in this article, get in contact with your local RSM Pharmacy Business Expert.
This article was originally published in Gold Cross Products & Services Pty Ltd • ITK Issue 68 • October-November 2019