The pharmacy cash flow crisis for independent pharmacy owners is NOT over! Master these 3 KPIs and dramatically improve your cash flow before the end of the year.
The so-called DIR Fee Apocalypse may be over, but don’t let that give you a false sense of security. For many independent pharmacy owners, pharmacy cash flow remains THE #1 PROBLEM. It’s pushing some owners to close their doors or drown in debt.
This isn’t the end of the road, though. In fact, by focusing on a few key performance indicators (KPIs), you can take actionable steps to turn around your finances and, ultimately, wrap up 2024 on a stronger note.
In this guide, I’ll break down the three most critical KPIs for independent pharmacies, explain how to calculate each one, and outline practical steps you can take to improve them. So, let’s get started on a better path toward pharmacy cash flow freedom!
KPI #1: Gross Profit Per Prescription
What It Is:
Gross profit per prescription measures the amount of profit you’re making on each prescription after deducting the direct costs associated with it. In other words, it gives you insight into how much you’re actually earning from each sale.
To calculate it, use the following formula:
Gross Profit Per Prescription = (Total Sales – Cost of Goods Sold) / Number of Prescriptions Dispensed
For example, let’s say you sold a medication for $100, and the cost to acquire it was $70. In this case, your gross profit on that prescription would be $30.
The goal here is simple: the higher, the better! Personally, I look for a minimum of $16.Why It Matters:
With razor-thin margins and increasing overhead, you can’t afford to dispense prescriptions that aren’t profitable. Tracking gross profit per prescription shows which drugs or services are bringing in revenue and which may be dragging down your financial health.
Practical Steps to Improve Gross Profit Per Prescription:
1. Leverage Your GPO: If you’re in a Group Purchasing Organization (GPO), use your membership to get better prices. Most GPOs offer volume discounts. Ask your GPO about all available programs, or consider excluding high-cost specialty items from your calculations. Cash flow is key, so see if you can delay your payment date without affecting your net COGS.
2. Move To A Secondary Wholesaler: A great way to get better overall pricing on your drug stock is to shift most of your purchases to a secondary wholesaler. They offer straightforward net pricing—no confusing rebate games. Many also provide 30-45 day payment terms and may even accept credit cards. Some top options include Real Value Products, JamsRx, EzriRx, BluPax, R&S, and RxCherryPick.
3. Dispense Higher Margin Items: Some drugs have low payouts, and some pay well. It’s an unfair game we’re forced to play. Common winners include supplies like needles and alcohol swabs from Astor Drugs. A few high-payout drugs are Coxanto, Oxaprozin, Xyzbac, Ziphex, Probichew, and Xybiotic.
KPI #2: Inventory Turnover Ratio (Inventory Turns)
What It Is:
The inventory turnover ratio shows how often you sell and replace your inventory in a given period. Although it’s usually calculated annually, you can also use a monthly number (multiplied by 12) or a quarterly number (multiplied by 4) for other time frames.
To calculate it:
Inventory Turnover Ratio = Annualized Cost of Goods Sold (COGS) / Average Inventory Value
Goal: Minimum of 20. Much better at more than 24. Low chance of cash flow issues when in the 30s.
For instance, if your annual COGS is $1,200,000 and your average inventory value is $100,000, then your inventory turnover ratio would be 12. This means you turn over your inventory 12 times a year, which means you are probably hurting for cash.
Why It Matters:
If your turnover ratio is low, cash is likely tied up in inventory that isn’t moving. Think of each bottle on your shelf as a stack of cash. When cash sits on your shelf, it’s not available to pay bills, which reduces your cash flow. It can also lead to more expired products.
Practical Steps to Improve Inventory Turnover Ratio:
1. Managed Ordering: The best time to control your inventory and improve pharmacy cash flow is when ordering. Trick: ensure your daily order amount is less than your daily COGS amount.
2. Implement Just-in-Time Ordering: Aim to order stock only when needed rather than over-ordering in anticipation. This method helps prevent excess inventory from sitting on shelves and consuming valuable cash flow.
3. Clean Inventory Regularly: Identify items eligible for return to your primary wholesaler before it’s too late. Take advantage of programs like MatchRx to sell unreturnable items and boost your pharmacy cash flow.
KPI #3: Labor as a Percentage of Revenue (Payroll Ratio)
What It Is:
Labor as a percentage of revenue is the proportion of your income that goes toward paying your staff. This KPI shows whether your labor costs align with your revenue.
It’s calculated as follows:
Labor Percentage = (Total Labor Costs / Total Revenue) x 100
For example, if your monthly revenue is $100,000 and your total labor cost is $20,000, then your labor as a percentage of revenue is 20%.
Goal: For better pharmacy cash flow, keep this number at no more than 13% and even better if it is lower than 11%.
Why It Matters:
Labor is typically the largest expense in a pharmacy and the second largest drain on pharmacy cash flow after inventory. If this KPI is too high, it suggests you’re spending too much on labor relative to the revenue you’re bringing in.
Practical Steps to Reduce Labor as a Percentage of Revenue:
1. Optimize Staffing Levels: Use your historical sales data to identify peak hours and schedule your team accordingly. Avoid overstaffing during slow periods to control unnecessary payroll costs.
2. Delegate and Automate: Delegate routine tasks, like filling prescriptions or updating inventory, to technicians. Automation tools, like refill reminder software, also help reduce the need for hands-on work and can increase efficiency.
3. Bonus Staff For Revenue Generation Activities: No one loves a good employee bonus program more than I do. If you want a bonus program to boost pharmacy cash flow, then focus on bonusing activities that drive additional sales and profit. Ideas like OTC sales, therapeutic optimization, or refilling of higher-margin prescriptions.
Creating Your KPI Game Plan for 2024
With the end of the DIR Fee Apocalypse era, pharmacies may feel some relief, but pharmacy cash flow constraints remain. Understanding and acting on these three KPIs—gross profit per prescription, inventory turns, and payroll ratio—will empower you to navigate these challenges proactively. Each KPI offers a different perspective on your business’s financial health. So, use them together to build a comprehensive strategy that addresses cash flow from multiple angles.
Here’s a quick action plan to get you started:
1. Run a Baseline Report: Calculate each of the KPIs above with your current numbers to see where you stand.
2. Set Quarterly Goals: Decide realistic targets for each KPI and outline the specific steps you’ll take to meet them.
3. Monitor Regularly: Set up weekly reviews of each KPI. Don’t wait until the end of the year to see where you’re off-track. Regular monitoring helps you catch issues early and adjust as needed.
4. Celebrate Small Wins: Improving KPIs takes time, so celebrate small milestones along the way. Incremental progress is still progress!
By focusing on these critical KPIs and implementing targeted strategies, you’re well on your way to turning your pharmacy’s cash flow around and setting up a more resilient financial foundation. Here’s to a profitable close to 2024!
If you want a thriving, profitable pharmacy without figuring it all out on your own, I invite you to join Pharmacy Badass University. The #1 pharmacy owner membership is guaranteed to get you on the right track. We have a membership option that will fit every cost and time budget.
