November 12, 2020
Inside: Use key performance indicators that line up with your pharmacy’s financial and operational goals.
If you want to make meaningful progress in growing your independent pharmacy business, you need to identify critical metrics known as Key Performance Indicators, or KPIs. With KPIs, you can set targets that will help you improve the quality of service you provide patients, financial outcomes, efficiency in pharmacy operations, and more.
In order for key performance indicators to be effective, they need to be quantifiable. You should be able to look at KPIs year over year and be able to identify if they have improved, worsened, or stayed steady. Not all independent pharmacies will have the same KPIs — what you choose to focus on will depend on your goals as a business.
When you are deciding which KPIs to zero in on, it’s good to remember your SMART goals, meaning your KPIs are Specific, Measurable, Achievable, Relevant, and Time-Bound.
While you contemplate which goals are right for your pharmacy, here are a few commonly measured key performance indicators that could set you up for success.
Operational indicators can tell you a lot about how smoothly things are running at your pharmacy. They reveal a lot about if the decisions you make are actually helping you provide better service to patients, and can show you if you are using your resources efficiently.
Here are some operationally focused key performance indicators that can help you streamline your pharmacy.
Since the vast majority of your pharmacy’s sales come from prescriptions, it’s important to identify your average prescriptions filled per day, and whether that number is trending upward or downward. Here’s how you calculate it:
Prescriptions Filled Per Day = Total Prescriptions Filled Last Year ÷ Number of Business Days Last Year
The average pharmacy fills 57,414 prescriptions a year, or 157 prescriptions a day, according to the most recent NCPA Digest. If you’re using this metric as a KPI, you may want to set a goal that makes sure you’re measuring up with other independent pharmacies.
Customer satisfaction isn’t as concrete a metric as others, but it’s still important to try to measure. The more satisfied your patients are, the more frequently they will use your pharmacy, and the more likely they will be to tell their friends and family about it.
An operating expense ratio is one way to measure how efficient your pharmacy operations are. It’s calculated using this formula:
Operating Expenses Ratio = Operating Expenses ÷ Revenues
The lower your operating expenses ratio is, the more profit you make. By paying attention to your operating expense ratio over time as one of your key performance indicators, you should be able to find ways to either lower your operating expenses while maintaining the same amount of sales or increase sales while maintaining the same operating expenses, both of which will increase your profitability.
If your inventory is sitting on the shelves for a long time, you risk medications expiring before they are dispensed and tying up cash flow. That’s why inventory turnover is an important KPI to keep track of.
Inventory Turnover = Annualized Inventory Cost of Goods ÷ Total Inventory
This number should be more than 10 — if it’s smaller than that, you may want to rethink your inventory management to make your buying strategy more efficient and improve your cash flow.
Your staff is what keeps your pharmacy running, but that doesn’t mean staffing practices don’t deserve the occasional scrutiny. You should have enough people to serve patients quickly without putting too many people on the schedule and bloating your payroll.
To figure out whether or not you’re spending too much on payroll, you can use this formula:
Payroll Expenses as a Percentage of Revenue = (Total Payroll ÷ Total Revenue) x 100
For most businesses, 15 to 30 percent of revenue will end up going to payroll. If your payroll expenses are higher than that, using payroll expenses as a percentage of revenue as a KPI could help make your pharmacy more efficient.
If you are meeting the goals you set with your operational indicators, you should see those successes reflected in your financial key performance indicators. These indicators help you measure if all the added efficiencies on the operational side are being translated into financial successes.
Here are a few financial KPIs you could be setting goals for.
Your gross profit margin is a percentage value that represents how much money you have to cover things like fixed costs, operating expenses, and taxes. You calculate it using this formula:
Gross Profit Margin = (Total Sales – Cost of Goods Sold) ÷ Total Sales
It’s used as a general measure of financial health. When it’s low, you may not be able to pay all your bills, but if it’s high, the pharmacy is healthy enough to stay in business and grow.
It makes for a good key performance indicator because it’s a metric you can always work to improve. According to the 2020 NCPA Digest, the average pharmacy has a gross profit margin of 22 percent, so that is a good benchmark if you aren’t sure where to set your KPI.
Your pharmacy’s net worth ratio compares your debts to equities, and it’s a metric banks pay close attention to when they are deciding whether or not to extend a loan or line of credit.
Here’s how to calculate it:
Net Worth Ratio = Total Liabilities ÷ Net Equity
If your debts and equity are well-balanced, your net worth ratio will be less than two.
Because easy access to credit is crucial in keeping your cash flow consistent, using your net worth ratio as a KPI can be a smart move. If your net worth ratio is currently less than 2, aim to keep it that way by making sure your equity increases whenever your liabilities do. If it’s greater than 2, working to increase pharmacy profits or eliminate high-cost debt can help you improve.
Sometimes known as an acid test, a quick ratio is another indicator of your pharmacy’s overall financial health. It tells you how liquid your assets are, or how easily you would be able to convert your assets to cash if you needed to quickly cover your liabilities. You can calculate the quick ratio with this formula:
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities
If your quick ratio is currently less than 1, that might be a good KPI to focus on, because it means you might have trouble covering your debts.
If your goal is to keep your pharmacy growing, measuring sales growth as a key performance indicator can help you stay focused. Here’s how you calculate monthly sales growth as a percentage:
Sales Growth = [(Current Month’s Sales – Previous Month’s Sales) ÷ Previous Month’s Sales] x 100
If the number is positive, then the pharmacy is growing, but if it’s negative, sales are shrinking. For independent pharmacies that are growth-minded, setting a KPI to grow by a certain percentage every month creates a clear benchmark for success.
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their business. The company is a member-owned organization that serves independent pharmacies with group purchasing services, expert contract negotiations, proprietary purchasing tools, distribution services, and more.
PBA Health, an HDA member, operates its own NABP-accredited (formerly VAWD) warehouse with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products.
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