Every pharmacy needs a way to measure progress. Without metrics, there’s no way to see where your business is at, what’s working, and what areas you need to focus on improving.
Thinking about all the data and numbers you have access to through your point-of-sale system might make the idea of reviewing metrics a bit overwhelming. Luckily it doesn’t have to be. Canned reports on key areas can help, or you can just zero in on the specific metrics that are the most important to you.
But what metrics should be the most important for a pharmacy? Where is the best place to start?
CPA and Business Coach John Marshall joined us recently to share is top 10 metrics for pharmacies.
#1 RX inventory Turnover
What is it?: The Rx Inventory Turnover metric is your annual cost of goods sold divided by your value of your Rx inventory. You may already have a good idea of what this number is.
Why does it matter? Cash goes to hide on your shelf. Inventor is the number one cost in your pharmacy. This means that Rx inventory turnover is a good measure of your efficiency in the pharmacy and helps you measure your liquidity.
What should you aim for? If your Rx inventory turnover ratio is less than seven, you’ve got a problem. Ideally, you want to be over 12 or 13. Afterall, an Rx inventory turnover of 12 means that your turning the inventory once per month. Meaning that you should never have more than one month worth of inventory on your shelves. Especially since you can order product today and have it in stock tomorrow.
Bottom line, improve your Rx inventory turnover ratio and have more cash in the bank.
#2 Revenue Growth Percentage
What is it? Take your last year’s revenue (2020 in this example) and subtract from it the previous year’s revenue (2019). So 2020 revenue-2019 revenue. Then divide it by your 2019 revenue to get a percentage.
Why does it matter? This is your most simple measure of growth, allowing you to understand whether you are growing, shrinking, or remaining stagnant.
What should you aim for? The end goal here is that you aren’t shrinking, but if you can get this number to 6%, you’re doing really well.
#3 Payroll Expense Ratio.
What is it? Add your employee wages, payroll taxes and employee benefits all together, and then divide it by your annual revenue. If you’re paying yourself as a pharmacist, include that number too, but don’t include any excess benefits or pay that you provide yourself as an owner.
Why does it matter? Payroll expense is a very important ratio for all pharmacies. If inventory is your number one area where cash goes to hide, payroll is the second. Payroll is something you really have to manage and make sure you keep under control in your pharmacy.
What should you aim for? The average for this number falls somewhere around 12-13% so that’s where you want to be. It’s worth noting that the larger your pharmacy or organization is, the easier it’s likely going to be to keep this percentage lean.
#4 Days Cash on Hand
What is it? Start by obtaining your average daily spend. This is calculated by adding your annual cost of goods sold to your annual operating expenses and dividing that sum by 365. Once you have that, take your ending cash balance and divide it by your average daily spend. This tells you how many days cash you have on hand. So, if you’re spending $10,0000 a day and you have $100,000 in the bank, you have about 10 days’ worth of cash on hand.
Why does it matter? This one is pretty self-explanatory. The pandemic proved that things can change rapidly. (Remember when you thought that a few extra rolls of toilet paper around the house was enough?) Having extra cash on hand gives you breathing room for when things go sideways. Allows you to pay your bills without checking your bank account balance several times a day. And gives you capital to work with to create additional revenue streams.
What should you aim for? Shoot for at least 15 days of cash on hand. This is the number that should give you leeway to pay your bills without stress. Ideally, you want to get that number up to 30 days if you can.
#5 Non-rx Gross Profit Percentage
What is it? The non-rx gross profit percentage calculates how much of your gross profits are coming from sources that are non-third-party contract. To obtain this number, take your gross profits from OTC services and other cash business and divide that by your total gross profits to get a percent.
Why does it matter? It’s hard to be an independent pharmacy. Insurance companies are setting your revenues and reimbursements are shrinking. It’s getting harder and harder to make ends meet when you are solely relying on insurance companies, Unfortunately, it’s not a matter of if they are going to rob you but how much they are going to take. So measure what you’re bringing in not only through OTC sales, but through services like point-of-care testing and other services.
What should you aim for? As you can probably guess, getting this percentage higher is better for your pharmacy business. Ideally you want to see your non-rx gross profit percentage at 20% or higher.
#6 thru #10
There are 5 more amazing pharmacy metrics as well as detailed insights on the metrics we already covered. Click here to watch John Marshall present all 10 of his top pharmacy metrics AND help you use them to give your pharmacy a grade.