So, you want to own a pharmacy, Part 3 – Know your numbers

As pharmacists at some point or another we’ve all had the thought cross our minds. Is ownership for me? For some people the idea strikes no interest. For others it’s in their blood. They knew the day they got their pharmacy school acceptance letter that this is what they wanted to do. Then there are those in the middle who aren’t quite sure if it’s for them. This series of articles will bring some useful concepts, considerations and decisions to help you understand if ownership, and what type of ownership is for you and answer “Are you fit for ownership?”

Know your numbers

How well do you understand your numbers? Numbers can be a daunting task for many people and there is no shame in that. It is the main reason that it is always recommended to utilize a professional when considering transactions, especially ones that are complicated. But there are some basics that individuals should understand. As a pharmacy owner and pharmacy manager you may be wearing many hats. However, understanding your store’s basic numbers can help you make informed business decisions.

SALES/REVENUE

Is the value of the amount of what was sold during a given period to customers. In pharmacies this often encompasses three main areas: the front store items that were sold along with anything that was behind the counter, the prescriptions dispensed, as well as any services billed. The sales/revenue of a pharmacy can have various components that impact the amount from changes in competition, changes in patient numbers, and changes from regulatory.

COST OF GOOD SOLD (COGS)

Traditionally your COGS refers to the direct costs of producing or purchasing the goods sold by a company. In pharmacy the COGS predominantly refer to the cost the merchandise (inventory) from suppliers, like wholesalers, manufacturers, etc. and are goods/products are sold to your patients. Unlike many traditional retail stores, in pharmacy the payment may not come directly from the patient but rather a third-party payer (private, provincial, federal). The COGS do not include labour costs, rent, salaries, etc.

How do I manage my COGS? 

COGS are important as they are an expense. COGS are deducted from your revenue to determine your gross profit. In pharmacy the goods sold are medications which are your inventory. Understanding the flow of your inventory can help you better understand COGS.

Recognizing who your patients are can help manage where you will need and not need as much inventory. Many pharmacy management systems come with perpetual inventory that will help ensure your stock is to your set values, recognizing that when an item is sold there needs to be a reorder of that quantity. Knowing what your fast movers are, which molecules are specific to which patients helps you understand when a high cost medication may be needed. Similarly, keeping a close eye on drugs that are not returnable helps reduce waste. Inventory sitting on your shelves is noted as an asset, however, it is not liquid and its value in cash is not really seen until it is reimbursed.

Net Sales/Revenue – COGS = GROSS PROFIT

OPERATING EXPENSES

A pharmacy has various operating expenses. An operating expense is basically any expense that you have while running your day-to-day operations. This can include rent, salaries, utilities, equipment, marketing, etc. Understanding the breakdown of your operating expenses is key in improving your pharmacy’s performance. Understand where you have the greatest expenses and also where those expenses are meaningful. For example, a pharmacy will automatically see salaries increase as patient/prescription numbers increase. This may be from needing to open extra hours or needing additional staff for the labour. If you are opening extra hours, you may also see utility charges increase. If you are adding additional staff, you may also see your benefits expenses increase. There is a balance to every pharmacy’s operations, and it is important that you monitor these expenses to make sure they align with your practice. 

How can I manage my operating expenses?

There are various operating expenses a pharmacy faces; some are fixed where others have options to be flexible. Salaries and labour are an expense that pharmacies have to keep a key eye on. This does not mean leaning out staff but instead ensuring your pharmacy revenue is reflective of the staff and labour you employ. Increasing effective staff time automation can help you allocate staff resources appropriately. Your day-to-day workflow, hours of operation, and staff utilization impact your operating expenses. You may often find people refer to the net profit as the bottom line. Controlling your operating expenses has a significant impact on your bottom line.

Gross Profit – Operating Expenses = NET PROFIT

Do you understand your CASH FLOW?

Cash flow is the path funds take from the sale at the register to be a liquid cash asset in your account and then out of the account to pay expenses. Cash flow is crucial as the more cash you have on hand the more equipped you are to invest in your business, pay bills, etc. It is important to note that seeing cash in the account takes time and many factors can affect this, such as processing time, type of reimbursement, bank processing time, etc. Having a high-level understanding of when cash is meant to enter the account and when expenses are due can help you manage your cash flow.

There is a lot more than just this to understand pharmacy financial numbers: assets, liabilities, understanding your balance sheet, etc. You should always educate yourself further in this area, not go it alone, but ask the right questions. Ensuring you have the support of partners who are not only financially competent but also have a specialization in the pharmacy industry can help you see your financial picture more clearly. Trusted partners are critical to success and can help answer: “Do the numbers make sense?”

It is important to remember that this article does not replace specific financial advice. It is meant to highlight the importance of understanding your business’s numbers. It is always best to have your personal situation assessed by an experienced/trained, specialized individual.

References:

1. https://www.accountingcoach.com/accounting-basics/explanation/2
2. https://www.accountingtools.com/articles/basics-of-accounting.html
3. https://www.pharmacists.ca/products-services/pharmacy-management-in-canada/

Pavithra Ravinatarajan RPh is the founder and principal consultant of Pavithra Consulting Inc.