Key Performance Indicators (KPIs) are the important numbers that tell you how well your pharmacy is doing and point you in the right direction for where you need to focus your time and energy.
Taking The Pulse Of Your Pharmacy With KPIs
It’s really important to monitor the health of your pharmacy. By health, I mean cash flow and profitability. While there are hundreds of data points you can pay attention to, you should really focus on the key basic metrics.
These metrics are equivalent to blood pressure and weight for patients. They don’t tell the full story, but these easy-to-obtain numbers give you a quick picture of health. That’s why I’m obsessed with ensuring owners are paying attention to the right metrics so your pharmacy runs smoothly and makes more money.
When you don’t keep your eye on the proverbial ball, you can run into several problems. The worst of all is managing by assumptions. Instead of making intelligent decisions based on actual data, you start to go by your gut or what’s popular and assume data points about your pharmacy, which leads to mistakes and loss of profit and cash flow.
But Data Is So… Tricky, Hard, Boring, Time-Consuming…
I understand that tracking KPIs might feel overwhelming and like something you don’t have time for, but failing to prioritize KPIs is failing in business.
If you are hesitant to dive into your data, it could be for one of the reasons below. Being aware of why you’re resistant can help you overcome the blockade.
- Lack of Awareness: Some pharmacy owners may not fully understand the importance of KPIs or may not be aware of which metrics are most relevant to their success.
- Time Constraints: Running a pharmacy involves many day-to-day responsibilities, and owners may feel overwhelmed or too busy to dedicate time to tracking and analyzing KPIs.
- Limited Know-How: You may not know exactly where to find the data you are looking for or which ‘math’ you need to use.
- Fear of Bad Results: Owners may be hesitant to track KPIs out of fear of uncovering negative or underperforming areas of the business. The head-in-the-sand approach rarely is a winner.
- Unsure of Action Steps: Data is only important if it is actionable. Many pharmacy owners don’t know what to do in order to change a KPI.
Let’s boil it down to the basics for you.
These 3 KPIs are THE MOST IMPORTANT for any independent pharmacy.
If you get these three right, the rest is all downhill. That is how critical they are.
1. Expense Ratio
Expense ratio, also sometimes called operating expense ratio, shows how much of a pharmacy’s total revenue is used for running the business. These expenses tend to include rent, utilities, payroll, marketing, and other overhead costs necessary to maintain daily operations.
It does NOT include your inventory. Inventory is not a financial expense; it is an exchange of assets, such as turning cash into a bottle on the shelf. While, as an owner, you see money leave the bank when you purchase inventory, technically, the money isn’t gone. It just changed its form to inventory.
Your expense ratio is calculated by dividing total operating expenses by total revenue and is typically expressed as a percentage.
For example, if your pharmacy’s total operating expenses are $18,000 and its total revenue is $100,000 for April, the expense ratio would be 18%. This means that 18% of your pharmacy’s revenue is used to cover operating expenses.
A high expense ratio indicates that operating expenses are consuming a significant portion of your pharmacy’s revenue, leaving less room for profit margins. Alternatively, a low expense ratio suggests that the pharmacy is operating efficiently, with lower overhead costs relative to income. You should aim for your expense ratio to be less than 19%.
One of the quickest ways to improve your profitability is to decrease your expenses. Every dollar you save becomes a dollar in profit.
2. Payroll Expense Ratio
Besides inventory, payroll is the largest drain on cash flow. The payroll expense is part of the expense ratio above. For many pharmacies, if your expense ratio is too high, I am placing my bet it is due to payroll.
Pharmacy owners are nice people. You are likely a nice person. Firing someone is not high on your like-to-do list. I recently spoke with a pharmacy owner who was telling me he might have to close his pharmacy within 3 months. When I dove into his numbers, his payroll ratio was over 20%!!! It should be no more than 13% and ideally below 11%. He answered that he just couldn’t fire people. His employees had been with him for so long, and he felt obligated to keep them all. So, because he didn’t fire people, his whole business is in jeopardy, and everyone will lose their jobs if he closes.
You must keep your payroll in line with your revenue. The future of your pharmacy depends on this KPI. To calculate it, take your total payroll expense and divide it by your total revenues. The resulting number is displayed as a percentage.
3. Inventory Turns
Your inventory is the most significant asset you have. It is also the biggest cash monster in your pharmacy. If cash flow is a problem, then you need to get your inventory under control.
Now, in terms of difficulty in calculating and tracking, this KPI metric is one of the hardest for pharmacy owners. Why? Well, because you have to use financial numbers, not just easy numbers from your pharmacy management system. Also, the math is a bit more complicated too.
Don’t let the awkwardness of learning to pull the data and calculate this critical KPI stop you from doing so. If you were to track only ONE KPI, this should be it. If you use a bookkeeper or CPA, enlist their help with this number. Make them calculate it and report it to you every month.
Here’s the math: Annualized COGS ÷ Current Inventory Value = Inventory Turns.
If that sounds like a foreign language to you, you are not alone. Once you get it, and I promise you will, it will help you run your pharmacy so much more efficiently. Your goal should be to have more than 24 ‘turns’. So, you want the result from the equation above to be a bigger number than 24. The higher the number, the better off your cash flow will be.
Have You Ever Wished For A Pharmacy Treasure Map?
Tracking KPIs is it!! It may not be as exciting as finding a washed-up bottle on a beach with a treasure map inside. However, KPIs are predictable sure-bet winners, unlike trying to find an X on a map.
These 3 KPIs are the most critical, and there are more you may be interested in. I have put together the top 7 KPIs for independent pharmacy owners. You can download the Excel Spreadsheet HERE.
Still unsure if investing time to understand KPIs is worth it?
I am a huge fan of using bookkeepers and accountants. And not all are created equal. One of my Inner Circle members, Gbessay, was working hard on her KPIs, and things just weren’t adding up. After diving into her numbers, we discovered her financial professional was calculating her KPIs incorrectly!! This mistake was giving her a ton of false information.
Pharmacy is a tricky business. Even professionals can get it wrong. When you take the time to understand the MOST IMPORTANT numbers in your business, you are taking control of your future. You can ensure you are getting the correct information. Feel free to share this article with your financial professionals.
