NATIONAL COMMUNITY PHARMACISTS ASSOCIATION

National Community Pharmacists Association

FINANCIALS

2009 NCPA Digest

sponsored by cardinal health

Member Edition Project Editor Donna West-Strum, RPh, PhD Associate Professor, Department of Pharmacy Administration The University of Mississippi Oxford, Mississippi Project Director and Financial Editor Devin Stone, MA Health Care Economist National Community Pharmacists Association Alexandria, Virginia Creative Enjua Claude Senior Director, Creative Sarah Diab Senior Designer Contributors Chris Linville Director and Managing Editor, America’s Pharmacist National Community Pharmacists Association Alexandria, Virginia Bryan Ziegler, PharmD, MBA Assistant Dean and Clinical Assistant Professor South Carolina College of Pharmacy Columbia, South Carolina Amod Athavale Graduate Student, Department of Pharmacy Administration The University of Mississippi Oxford, Mississippi Copyright © 2009 National Community Pharmacists Association (NCPA®), Alexandria, VA, USA. All Rights Reserved. No right of reproduction without the prior written consent of NCPA.

[October 2009]

Dear Valued NCPA Member:

We are pleased to present you with the complete financial information of the 2009 NCPA Digest, sponsored by Cardinal Health. In today’s pharmacy environment, it is more important than ever that you take an in-depth look at your pharmacy’s financial picture against national pharmacy averages to come up with a real-world strategy for your pharmacy’s future. Outlined here is an approach to assist you in successfully integrating the key Digest findings into an action plan for your pharmacy.

Step 1: Use your financial statements to assess your present situation and identify any significant trends. If you participated in the survey, then you will receive a free benchmarking analysis from NCPA using the data you submitted.

Step 2: Compare your company’s current status to: • Your own past performance (prior years’ financial statements) • Ratios for the Top 25 percent (Tables 2–4) • Ratios for “All Pharmacies” (Tables 2–4) • Ratios for pharmacies in your sales category (Tables 5–7)

Step 3: Identify the strengths and weaknesses of your company and identify possible causes for the problems. Refer to the Guide to Benchmarking available only to NCPA members at www.ncpanet.org/members/digest.php.

Step 4: Set goals for the year and develop a written action plan for achieving better results.

Step 5: Implement plan and monitor its progress. Review the plan monthly and evaluate its performance and focus on additional areas that may require improvement. Revise the plan periodically if necessary.

Step 6: Repeat the entire process, making corrections and adjustments for the differences between actual results and measurable goals. Financial management is an ongoing process, not a short-term project.

Step 7: Work with your fellow pharmacists, your internal management team, professional accountant, and outside business advisers to gain the most from their expertise and this process. We know that you will find the information contained in these pages useful for your pharmacy. For more information about NCPA’s various management offerings, including continuing education seminars, publications, and web resources, visit NCPA’s website at www.ncpanet.org or contact the NCPA Management Institute at 800-544-7447.

2009 NCPA Digest

sponsored by cardinal health

Table of Contents

6 Executive Summary

9 Methodology

10 Operating Results 19 Sales Volume Summary 25 Cost of Dispensing 27 Third-Party Prescriptions 34 Geographic Summary 38 Rural versus Metropolitan Locations 41 Overview of Financial Statements and Performance Measures

Figures 1. Average annual sales (in thousands) per pharmacy location, 10-year trend • 7 2. Cost of Dispensing — By Geographical Region • 25 3. Third-Party Prescription Activity — Five-Year Trend • 27

Tables 1. Averages of pharmacy operations, 10-year trend • 7 2. 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales • 16 3. 2008 Median Financial Benchmarks • 17 4. 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets • 18 5. 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales — By Sales Volume • 22 6. 2008 Median Financial Benchmarks — By Sales Volume • 23 7. 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets — By Sales Volume • 24 8. Summary of Third-Party Prescription Activity • 27 9. 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales — By Third-Party Prescription Activity • 28 10. 2008 Median Financial Benchmarks — By Third-Party Prescription Activity • 29 11. 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets — By Third-Party Prescription Activity • 30 12. 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales — Portion of Prescriptions Covered by Medicare Part D • 31 13. 2008 Median Financial Benchmarks — Portion of Prescriptions Covered by Medicare Part D • 32 14. 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets — Portion of Prescriptions Covered by Medicare Part D • 33 15. 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales — By Geographic Region • 35 16. 2008 Median Financial Benchmarks — By Geographic Region • 36 17. 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets — By Geographic Region • 37 18. 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales — Metropolitan vs. Rural • 38 19. 2008 Median Financial Benchmarks — Metropolitan vs. Rural • 39 20. 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets — Metropolitan vs. Rural • 40

Table of Contents

Executive Summary The 2009 NCPA Digest, sponsored by Cardinal Health provides an annual overview of independent community pharmacy, including a comprehensive review of the financial operations of the nation’s independent community pharmacies for 2008. Independent community pharmacies are all pharmacistowned, privately held businesses but vary in practice setting. They include not only single-store operations but other independent community pharmacist-owned operations such as chain, franchise, compounding, long-term care (LTC), specialty, and supermarket pharmacies. In 2008, 14 percent of participating pharmacies had total sales over $6.5 million, 31 percent with sales between $3.5 and $6.5 million, 24 percent with sales between $2.5 and $3.5 million, and 31 percent with sales under $2.5 million.

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Independent Community Pharmacy At-A-Glance 2008 Average number of pharmacies in which each independent owner has ownership

1.46

Value of inventory as cost and as a percentage of sales Prescription inventory

$242,621

6.3%

Other inventory

$39,963

1.0%

Total inventory

$282,584

7.3%

Annual rate of inventory turnover

10.4

Annual rate of prescription inventory turnover

11.7

Median sales per square foot Prescription sales per square foot

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$85

Total sales per square foot

$1,161

Number of prescriptions dispensed per pharmacy location New prescriptions

28,412

46%

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33,967

54%

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62,379

100%

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$3,732

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Average prescription charge

$58.02

Number of hours and days per week per location

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55

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In 2008 independent community pharmacy represented an $88 billion marketplace, with 93 percent of sales for independents derived from prescription drugs. Although many independents continue to face slim margins from private third-party contracts and government reimbursement programs, independents have strived to reduce their overhead costs by operating a more efficient business, investing in labor-saving technologies, and keeping payroll costs down. In 2008 there were 22,728 independent community pharmacies employing over 260,000 workers and providing high quality services and niche markets which are greatly valued by patients. )!

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Sales activity per hour open Prescription sales per hour

$1,266

Other sales per hour

$91

Number of prescriptions dispensed per hour

22

Percentage of total prescriptions covered by: Government programs (Medicaid or Medicare Part D)

44%

Other third-party programs

44%

Percentage of generic prescriptions dispensed

65%

Figure 1 • Average Annual Sales (in Thousands) Per Pharmacy Location %!!!

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An overview of the average independent community pharof pharmacies in which each independent owner has ownership is 1.46. macy is provided in Table 1. In general, the average independent community pharmacy location dispensed 62,379 prescriptions (200 per day) in 2008, which is a slight increase The NCPA Digest, sponsored by Cardinal Health data have for over 75 years, providing an opportunity been collected from last year’s prescription volume of 61,052. This trend % is ) to look at long-term trends for independent community similar to what other indicators in the pharmacy marketplace " pharmacies. (Go to www.ncpanet.org for the history of the are showing. Thus, the average independent community fell in the 1990s and since 1999 have Digest.) Gross margins $ to pharmacy is filling more prescriptions per day compared ' remained relatively flat at 22 to 24 percent. Alternatively, last year. Given this, independent community pharmacists average sales per pharmacy location have increased 97 are looking for ways to create a more efficient pharmacy, percent since 1999. # % " often by implementing new technologies. n Average sales per location for 2008 was $3,880,802, Independents continue to operate multiple pharmacies. slightly up from 2007. This is most likely correlated with an " Twenty-five percent of independent owners have ownerincrease in prescription volume and an increase in# average ship in two or more pharmacies and the average number prescription charge. F_UVc #&>

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TABL E 1 • Averages of Pharmacy Operations 1999 Sales

2000

2001

2002

2003

2004

2005

2006

2007

2008

100%

100%

100%

100%

100%

100%

76%

77.9%

76.4%

77.2%

76.8%

76.8%

100%

100%

100%

100%

Cost of goods sold

76%

76.7%

77%

76.5%

Gross profit

24%

23.3%

23%

23.5%

24%

22.1%

23.6%

22.8%

23.2%

23.2%

12.8%

12.2%

12.5%

13.1

13.2%

12.2%

13.4%

13.6%

13.7%

13.5%

7.6%

7.9%

6.9%

6.6%

6.8%

6.3%

6.5%

6.4%

6.5%

6.5%

20.4%

20.1%

19.4%

19.7%

20%

18.5%

19.9%

20%

20.2%

20%

3.6%

3.2%

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4%

3.6%

3.7%

2.8%

3.0%

Payroll expenses Other operating expenses Total expenses Net operating income

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Executive Summary

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n Gross margin remained constant as in 2007 at 23.2

implementation of Medicare Part D in 2006, an average # of 12.4 percent of independent community pharmacies percent. operated at a loss between 2001 and 2005. In 2006 the n Payroll expenses, as a percentage of sales, decreased F_UVc #&> $&> @gVc profitability of pharmacy a strong hit, 22.9 percent ofF_UVc #&> e`$&> e`'&> took '&> by 0.2 percentage points in 2008 to 13.5 percent. The #&> number of employees also decreased which allowed payroll independent community pharmacies operated at a loss for the fiscal year in 2006 while over 1,100 pharmacies ended expenses to decrease. As prescription volume increased, up closing their doors. In 2007 independent community pharmacists were challenged with becoming more efpharmacy saw a slight improvement compared to the pre,aP]LRP:[P]L_TYR4YNZXP;P]NPY_LRP ficient; thereby filling more prescriptions with less staff. vious year, with 19.2 percent of pharmacies operating at a n All other operating expenses remained at 6.5 percent. loss for the fiscal year 2007. n Through attempts by independents to lower their payroll expenses and control operating expenses, the average net Viability of Independent Pharmacy operating income increased to 3.2 percent. However, the Net Profit as a Percent of Sales Percentage of Accumulated &!!!!! net operating income dollars before tax remained '!!!! similar Pharmacies Percentages to 2007. "

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Viability of Independent Community Pharmacy Independent community pharmacies are working hard to improve their financial position. Historically, before the

14.7% #

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21.8%

65.4%

10% 11.8%

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Methodology Independent community pharmacy owners, having completed at least one entire year of operations, were invited to participate in this study. The survey form consisted of a questionnaire focused on demographics and non-financial information, a balance sheet, and an income statement. We have exercised the utmost professional care compiling the information received. While we have tested the information for clerical accuracy, the data supplied were not necessarily based on audited financial statements. NCPA does not make any assurances, representations, or warranties with respect to the data upon which the contents of this report were based. The information upon which the 2008 portion of the study is based was from fiscal years of January 1, 2008 through April 30, 2009, with 83 percent of the respondents reporting for the year ended December 31, 2008. Results from prior issues of the Digest have been incorporated with the 2008 results to facilitate assessing industry trends. Common-sized (average) financial statements are used to present the financial data in this report. The commonsized statement is computed by determining an average value for the entire group of respondents. The statistics presented in the financial tables entitled Financial Benchmarks represent the median ratios (mid-point) of the group of pharmacies presented. Median ratios indicate a “half-way point,” thereby dividing all those reporting into two halves: a top half (pharmacies having a ratio higher than the median) and a bottom half (pharmacies having a ratio lower than the median). For more information on common-sized financial statements and median ratios, refer to the Overview of Financial Statements and Performance Measures section. We have isolated the companies that were the most efficient at generating profits from sales and contrasted their results to all participating pharmacies. This group is referred to as the Top 25 Percent. To determine which participants would be included in the Top 25 Percent, the owner’s discretionary profit margin for each pharmacy was calculated.

Owner’s Discretionary Profit Margin

Net Profit Plus Owner Compensation Before Tax

Total Sales

Once each owner’s discretionary profit margin was computed, the amounts were listed in order from highest to lowest. The respondents were then separated into quartiles based on their owner’s discretionary profit percentage. The Top 25 Percent of the respondents were included in the top quartile. The goal of this process is to segregate the most profitable pharmacies so we can identify the management efficiencies that exist in the Top 25 Percent. Then we can evaluate the differences between pharmacies experiencing differing levels of profitability. For 2008, the various quartiles included pharmacies achieving owner’s discretionary profit margins in the following ranges:

Owner’s Discretionary Profit Percentage (As a Percentage of Total Sales) Top 25 percent

More than 10 percent

Third quartile

7.5 to 9.99 percent

Second quartile

4 to 7.49 percent

Bottom 25 percent

Less than 3.99 percent

Remember: Results for the Top 25 Percent include the companies who earned the highest owner’s discretionary profit percentage as discussed above. These are not necessarily the companies having the highest sales. All percentages shown above are reported before tax.

Methodology

Operating Results To determine how the participating pharmacies performed financially, the financial information from the survey was summarized and presented in three basic statements: common-sized income statement, median financial benchmarks, and common-sized balance sheet. These statements are provided in Tables 2, 3, and 4, respectively. From these tables, we have provided a summary of the results.

2008 Highlights n Average sales for all participating pharmacies was over

9.7 percent higher than sales for the Top 25 Percent, suggesting that smaller pharmacies are maintaining costs and generating profits more efficiently than larger pharmacies. n Gross margin remained constant as in 2007 at 23.2

percent for all pharmacies. The Top 25 Percent experienced a decrease in gross profit margin of 0.9 percentage points; however, they still had higher gross margins than all pharmacies (at 24.5 percent compared to 23.2 percent for all pharmacies).

to the improved reimbursement time for Medicare Part D plans and independent pharmacists’ ability to adapt to cash flow problems.

Profitability The charts below show what happens to each sales dollar for the “average” pharmacy versus the average independent community pharmacy in the top 25 percentile. The Top 25 Percent have 7.1 percent in net operating income (compared to 3.2 percent, the average for all pharmacies). To assess the real impact of their operating efficiency, apply this 3.9 percent difference to average sales of $3.8 million for all pharmacies. The result is more than $148,000 of added operating income dollars if the expense controls of the Top 25 Percent can be met. Their profit advantage comes from managing cost of goods sold, payroll expenses, and other operating expenses.

Gross Profit Margin

Over the past few years, gross profit margins have slightly n Median net operating income decreased by 0.27 percentage

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n Return on investment for all pharmacies decreased from

30 percent to 23 percent in 2008. n For all pharmacies and the Top 25 Percent, the current

ratio and quick ratio increased, indicating more liquidity and less potential for cash flow problems. This may be due

The Top 25 Percent have a 1.3 percent gross profit advantage by managing cost of goods sold and pricing. Their gross profit margin was 24.5 percent compared to 23.2 percent for all participating pharmacies. Still, the Top 25 Percent saw gross profit margins as a percentage of sales fall

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Sales Mix—Average for All Pharmacies 2006

2008

$3,169,010

92.4%

$3,344,571

92.8%

$3,619,354

93.3%

$260,654

7.6%

$259,842

7.2%

$261,448

6.7%

$3,429,664

100%

$3,604,413

100%

$3,880,802

100%

Prescription sales All other sales Total sales

2007

Cost of goods sold

$2,647,701

77.2%

$2,768,231

76.8%

$2,981,572

76.8%

Gross profit margin

$781,963

22.8%

$836,183

23.2%

$899,230

23.2%

Sales Mix— Average for Top 25 Percent 2006 Prescription sales All other sales

2007

2008

$2,500,048

94%

$3,126,113

95.2%

$3,328,345

94.1%

$159,578

6%

$157,626

4.8%

$207,690

5.9%

Total sales

$2,659,625

100%

$3,283,739

100%

$3,536,035

100%

Cost of goods sold

$1,962,804

73.8%

$2,449,838

74.6%

$2,668,603

75.5%

Gross profit margin

$696,821

26.2%

$833,901

25.4%

$867,432

24.5%

by 1.7 percentage points since 2006. Even the most efficient pharmacies are finding it difficult to maintain acceptable gross margins to pay the personnel and operating costs of managing a pharmacy.

year, while gross profit margin for the Top 25 Percent decreased by 0.9 percentage points. To evaluate trends in gross margin, we assessed how gross margins differed for prescription sales as compared to other sales.

To determine how the Top 25 Percent achieved their margin advantage, we assessed the sales mix and gross profit margins for prescriptions separate from other sales. Prescription sales increased for all pharmacies and the Top 25 Percent, while other sales decreased slightly for all pharmacies. Independent community pharmacies continue to focus mainly on prescriptions for the majority of their sales.

All pharmacies’ gross profit margin for prescription sales increased while gross margin on other sales decreased. The Top 25 Percent experienced a different trend. They saw gross margin on both prescription sales and other sales decrease. It appears gross margin on other sales are declining as independents community pharmacists strive to remain competitive. Because over 90 percent of sales in an independent community pharmacy are attributed to prescription sales, the overall gross profit margin trend usually follows the prescription sales gross profit margin trend.

Gross Profit Margin by Department As was mentioned earlier, the average gross profit margin for all participating pharmacies remained the same this

Gross Profit Margin by Department AV E R A G E F O R A L L P H A R M A C I E S

Gross margin on prescription sales

AV E R A G E F O R T O P 2 5 P E R C E N T

2006

2007

2008

2006

2007

2008

21.5%

22.1%

22.6%

25.3%

24.3%

23.9%

Gross margin on all other sales

38.2%

37.5%

30.1%

40%

46.8%

35.4%

Overall gross profit margin

22.8%

23.2%

23.2%

26.2%

25.4%

24.5%

Percent of sales dispensed generically

58.4%

60.6%

64.5%

59.8%

62.6%

66.4%

Operating Results

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Operating Expense Management

Staff Costs Per Employee

#e`% We evaluated two separate components of operating expenses—payroll expenses and other operating expenses. Payroll expenses include all wages, employee taxes, and benefits for all staff including owners. Other operating expenses include advertising, insurance, store supplies, !e`# %`c^`cV containers and labels, delivery expenses, office postage, pharmacy computer expense, rent, utilities and telephone, and “all other operating expenses.” These are the items @aVcReZ_XReR]`dd frequently referred to as overhead.

Staff cost per employee represents on average the amount of compensation, taxes and employee benefits paid during the year for each non-owner employee. Independent community pharmacies paid median staff costs of $42,804 per employee. That’s a 6.7 percent decrease since last year.

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Staff costs per employee for the Top 25 Percent remained almost constant in 2008. However, staff costs per employee for the Top 25 Percent were 4.1 percent lower than the costs for all pharmacies at $41,046 (compared to $42,804 for all #!!( #!!) pharmacies). Their staff were also more productive, that is, they generated more sales per employee ($455,306 for the Top 25 Percent compared to $447,344 for all pharmacies).

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Pharmacy Staff Positions 2006

2007

2008

Non-owner pharmacists

1.9

1.6

1.6

Technicians

4.6

3.7

3.8

Other positions

5.6

5

3.9

12.1

10.3

9.3

1.3

1

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Total non-owner employees Working owners—pharmacists and other positions Total workforce

13.4 FTE Employees

Hourly wages for staff pharmacists, technicians and clerks continued to increase in 2008. Staff pharmacist wages increased to $50.45 and pharmacy technician wages increased to $13.24. Clerk/cashier wages increased slightly to $9.05 per hour. Pharmacies reported the number of full-time equivalent (FTE) employees working during the year. Average responses showed staff decreases for 2008. This may be due to the necessity of controlling employee costs as gross margins remain flat. For purposes of this report, each 2,080 hours of work is considered one FTE (full-time equivalent) employee.

11.3 FTE Employees

10.5 FTE Employees

Productivity Optimum productivity is the result of efficiently controlling payroll expenses while maximizing results, or sales (that is, the effectiveness of workers’ efforts). Total payroll expenses as a percentage of sales is a benchmark for measuring cost efficiency. “Sales Per Employee” is a benchmark for measuring employee productivity. In 2008, for all participating pharmacies, sales per employee increased to $447,344. The Top 25 Percent had 1.8 percent higher productivity than the average for all pharmacies as measured by the sales-per-employee ratio.

Operating Results

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Debt Management

Managing assets and controlling debt enhances financial #!!% position. By efficiently managing assets, the amount of sales and profits generated from the pharmacy’s investment in assets increases. The largest and most important asset to the independent community pharmacy is its investment in inventory and is more thoroughly evaluated in the next section—Cash Flow. Here we assess the overall asset ef"%! $ ficiency considering all assets of pharmacies.

Overall, pharmacies had low risk as measured by the #!!& #!!' #!!( debt to worth ratio. The debt to worth ratio for the Top 25 Percent shows that for every dollar owners have invested in their business, the creditors have provided about 20 cents as compared to 48 cents for all pharmacies. The Top 25 Percent is “less risky” as measured by the debt to worth ratio. %)!!!

Asset Efficiency Ratios

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For purposes of this study, we measured asset efficiency using the sales to assets ratio. Refer to the Guide to Benchmarking for a review of how this ratio is computed and interpreted. You can download the Guide by visiting www. "#! ncpanet.org/members/digest.php. M E D I A N FO R A L L P H A R M AC I E S

Sales to assets

2006

2007

2008

$5.44

$5.09

$5.47

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Return on investment (ROI) decreased in 2008 for independent" community pharmacies. For every dollar owners invested, they earned 23 cents in net operating %%!!! income, which is worse than 2007 but better than 2006.

Alternatively, ROI for the Top 25 Percent increased in 2008 from 45.8 percent to 63 percent. The return on%!!!! investment ratio for the Top 25 Percent shows that for every dollar the owner has invested # in the business, they ?Z[ ;P]NPY_ ,WW;SL]XLNTP^ earned about 63 cents in net operating income after M E D I A N FO R compensation to owners but before tax. This compares TO P 2 5 P E R C E N T $'!!! #!!' #!!( #!!) to only 23 cents for all pharmacies. Even though the 2006 2007 2008 Top 25 Percent are operating with more of their own $5.53 $5.19 $5.66 money (a bigger investment), their higher profits result ;Ld]ZWWPc[PY^P^TYNWÒTYRZbYP]^L^L[P]NPY_ LRPZQ^LWP^ M E D I A N FO R A L L P H A R M AC I E S

Ratio

Computation

2006

Debt to worth

Total liabilities ÷ Net worth

Return on investment

Net operating income ÷ Net worth

2007

M E D I A N FO R TO P 2 5 P E R C E N T

2008

2006

0.53

0.66

0.48

0.3

0.3

0.21

30%

23%

43.5%

45.8%

63%

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14

2009 NCPA Digest, sponsored by Cardinal Health

2008

16.7%

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2007

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Cash Flow

by inventory and accounts receivable or provided by trade account creditors (vendors).

Managing Working Capital The amount of working capital, or cash flowing through the business, indicates liquidity. The current ratio is a common benchmark for measuring cash flow or liquidity. This ratio shows that the Top 25 Percent have $4.43 in current assets on hand for every $1.00 in current liabilities, and all pharmacies have $3.60 in current assets on hand for every $1.00 in current liabilities. The quick ratio is the other ratio that measures the companies’ ability to generate cash quickly—without selling inventory. The Top 25 Percent had $2.47 in cash and accounts receivable on hand for every $1.00 in current liabilities compared to $1.55 for all pharmacies. Both the current ratio and quick ratio for the Top 25 Percent and for all pharmacies increased in 2008. This is an indication that pharmacies may be overcoming some of their cash flow problems. Additionally, due to pressure, third-party plans, including those administering benefits through Medicare Part D, are reimbursing pharmacists more timely. Working capital is a cycle of funds moving through the pharmacy. The primary elements of the working capital cycle are inventory, accounts receivable, and accounts payable. These are the primary uses and sources of cash flow. We typically measure how efficiently the cycle is managed by assessing the number of days cash is consumed

Inventory was held in stock for 35 days in 2008, 2 days shorter than in 2007. The accounts receivable collection period also decreased from 22 days to 15 days for all pharmacies and from 19 to 17 days for the Top 25 Percent. This is reflected in the improvement in liquidity. The Top 25 Percent continued to pay their bills quicker than the median for all pharmacies.

Inventory Control The goal of inventory management is to minimize the investment in inventory as sales rise while ensuring that inventory is available when needed. Benchmarks for assessing inventory are inventory turnover (the number of times inventory is used up during the year), and inventory turn days. Turn days converts the inventory turnover ratio into the average number of days’ worth of stock on hand. The inventory benchmarks for independent community pharmacies are displayed below. Prescription inventory for all pharmacies turned faster than the overall turnover of all merchandise combined, as would be expected since over-the-counter medicines and other merchandise tend to turn more slowly. Prescription stock stayed on hand for 31 days (compared to 35 days for all inventory). The Top 25 Percent maintained similar turnover rates compared to all pharmacies.

M E D I A N FO R A L L P H A R M AC I E S

2006


2007

2008

2006

2007

2008

Cash flow is used for… Inventory turn days

35 days

37 days

35 days

35 days

37 days

37 days

Accounts receivable collection period

19 days

22 days

15 days

19 days

19 days

17 days

For a total of…

54 days

59 days

50 days

54 days

56 days

54 days

Cash flow is provided by… Accounts payable payment days

15 days

16 days

15 days

12 days

15 days

10 days

Net days in cycle

39 days

43 days

35 days

42 days

41 days

44 days

M E D I A N FO R A L L P H A R M AC I E S

Inventory turnover (annual) Inventory turnover days Prescription inventory turnover (annual) Prescription inventory turnover days


2006

2007

2008

2006

2007

2008

10.3

9.8

10.4

10.6

9.9

10

35 days

37 days

35 days

35 days

37 days

37 days

11.7

12.1

11.7

11.3

11.5

10.3

31 days

30 days

31 days

32 days

32 days

35 days

Operating Results

15

Tabl e 2 • 2008 Common-Sized (Average) Income Statement—Percentage of Total Sales A L L P H A R M AC I E S

2006

2007

2008

TO P 2 5 P E R C E N T

2008 Avg ($)

2006

2007

2008

2008 Avg ($)

Sales Prescription sales

92.4%

92.8%

93.3%

$3,619,354

94%

95.2%

94.1%

$3,328,345

7.6%

7.2%

6.7%

$261,448

6%

4.8%

5.9%

$207,690

100%

100%

100%

$3,880,802

100%

100%

100%

$3,536,035

72.5%

72.3%

72.1%

$2,800,434

70.2%

72%

71.7%

$2,534,439

4.7%

4.5%

4.7%

$181,138

3.6

2.6%

3.8%

$134,164

Total Cost of Goods Sold

77.2%

76.8%

76.8%

$2,981,572

73.8%

74.6%

75.5%

$2,668,603

Gross Profit

22.8%

23.2%

23.2%

$899,230

26.2%

25.4%

24.5%

$867,432

11.8%

11.8%

11.8%

$457,356

12.2%

12.5%

10.2%

$361,029

1.7%

1.9%

1.7%

$68,435

1.7%

1.5%

1.6%

$56,156

13.6%

13.7%

13.5%

$525,791

13.9%

14.0%

11.8%

$417,185

Advertising

0.5%

0.5%

0.5%

$17,562

0.4%

0.4%

0.3%

$12,578

Insurance

0.4%

0.3%

0.3%

$13,457

0.4%

0.3%

0.3%

$10,243

Store supplies, containers, labels

0.4%

0.4%

0.5%

$17,373

0.4%

0.4%

0.4%

$14,159

All other sales Total Sales Cost of Goods Sold Prescriptions costs All other costs

Operating Expenses Payroll Expenses Salaries, wages Payroll taxes, workers’ comp, employee benefits Payroll Expenses Other Operating Expenses

16

Office postage

0.1%

0.1%

0.1%

$4,468

0.1%

0.1%

0.1%

$3,123

Delivery service

0.2%

0.2%

0.2%

$8,853

0.3%

0.2%

0.3%

$9,225

Pharmacy computer expense

0.3%

0.4%

0.4%

$15,689

0.3%

0.4%

0.4%

$14,276

Rent

1.2%

1.2%

1.2%

$46,742

1.2%

0.8%

1.0%

$33,966

Utilities, telephone

0.5%

0.5%

0.4%

$16,443

0.4%

0.4%

0.4%

$14,054

All other operating expenses

2.8%

2.9%

2.9%

$110,878

2%

2.1%

2.4%

$86,744

Total Other Operating Expenses

6.4%

6.5%

6.5%

$251,465

5.5%

5.1%

5.6%

$198,368

Total Operating Expenses

20%

20.2%

20%

$777,256

19.4%

19.1%

17.4%

$615,553

Net Operating Income

2.8%

3.0%

3.2%

$121,974

6.8%

6.3%

7.1%

$251,879


Tabl e 3 • 2008 Median Financial Benchmarks A L L P H A R M AC I E S

2006

2007


2008

2006

2007

2008

Profitability Ratios Net operating income percentage = Net profit before tax ÷ Sales

2%

2.97%

2.7%

5.9%

6.52%

8.6%

$69,180

$89,000

$89,210

$151,677

$153,576

$254,748

$400,000

$423,718

$447,344

$412,910

$465,806

$455,306

$42,255

$45,883

$42,804

$37,836

$41,564

$41,046

$3,940

$3,637

$3,732

$3,383

$3,855

$3,477

$80

$80

$85

$74

$70

$98

$1,153

$1,134

$1,161

$1,337

$2,500

$2,067

$3,429,664

$3,059,350

$3,329,164

$2,659,625

$2,803,432

$2,838,603

5.44

5.09

5.47

5.53

5.19

5.66

16.7%

30%

23%

43.5%

45.8%

63%

0.53

0.66

0.48

0.30

0.30

0.21

Current ratio = Current assets ÷ Current liabilities

3.79

2.89

3.60

5.24

3.71

4.43

Quick ratio = Cash + accounts receivable ÷ Current liabilities

1.62

1.30

1.55

2.71

2.04

2.47

Inventory turnover (annual) = Cost of goods sold ÷ Inventory

10.3

9.8

10.4

10.6

9.9

10

35 days

37 days

35 days

35 days

37 days

37 days

11.7

12.1

11.7

11.3

11.5

10.3

31 days

30 days

31 days

32 days

32 days

35 days

18.7

16.6

23.7

18.4

19.5

22.1

19 days

22 days

15 days

19 days

19 days

17 days

25.1

22.4

24.1

30.1

24.8

36.6

15 days

16 days

15 days

12 days

15 days

10 days

Net operating income dollars before tax = Net profit before tax

Productivity Ratios Sales per employee = Sales ÷ # of employees including owners Staff costs per employee = Non-owner wage, tax, benefits ÷ # of employees excluding owners Prescription sales per square foot = Prescription sales ÷ Prescription dept square feet All other sales per square foot = All other sales ÷ Square feet excluding prescription dept Total sales per square foot = Total sales ÷ Square feet Median sales = Group middle point

Financial Position Ratios Sales to assets = Sales ÷ Total assets Return on investment = Net operating income dollars ÷ Net worth Debt to worth = Total liabilities ÷ Net worth

Cash Flow Ratios

Inventory turnover (days) = 365 ÷ Inventory turnover Prescription inventory turnover = Prescription cost of goods sold ÷ Prescription inventory Prescription inventory turnover (days) = 365 ÷ Prescription inventory turnover Accounts receivable turnover (annual) = Credit sales ÷ Accounts receivable Accounts receivable collection (days) = 365 ÷ Accounts receivable turnover Accounts payable turnover (annual) = Cost of goods sold ÷ Accounts payable Accounts payable turnover (days) = 365 ÷ Accounts payable turnover

Operating Results

17

Tabl e 4 • 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets A L L P H A R M AC I E S

2006

2007


2008

2006

2007

2008

Assets Current Assets Cash and cash equivalents Accounts receivable Inventory

15.7%

15.5%

18.5%

22.6%

24.4%

22.8%

23%

25.7%

23.4%

20.3%

19.9%

22.7%

43.1%

37.3%

38.8%

42.7%

36.5%

38.5%

Other current assets

4.7%

3.7%

5%

3.7%

6.1%

6.9%

Total Current Assets

86.6%

82.2%

85.7%

89.3%

86.9%

90.9%

9.6%

11.5%

10.2%

8.4%

7.3%

5.6%

Net fixed assets Other assets

3.8%

6.3%

4.1%

2.3%

5.8%

3.5%

Total Assets

100%

100%

100%

100%

100%

100%

Liabilities and Owners’ Equity Current Liabilities Notes payable (within one year)

5.4%

8.7%

7.5%

1.6%

2.5%

4.4%

Accounts payable

17.4%

15.8%

16%

12.2%

16.1%

11.1%

Other current liabilities

6.1%

8.1%

5.8%

4.1%

7.1%

3.5%

28.9%

32.6%

29.3%

17.9%

25.7%

19.0%

Total Current Liabilities

Long-Term Liabilities Notes payable to owner(s)

9.5%

8%

8.3%

7.6%

7.7%

5.2%

Other long-term liabilities

9%

10.5%

11.1%

8.3%

3%

8.9%

18.5%

18.5%

19.4%

16.0%

10.7%

14.1%

Total Long-Term Liabilities

18

Total Liabilities

47.4%

51.1%

48.7%

33.9%

36.4%

33.1%

Total Owners’ Equity

52.6%

48.9%

51.3%

66.1%

63.6%

66.9%

Total Liabilities and Owners’ Equity

100%

100%

100%

100%

100%

100%


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Sales Volume Summary

#

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$$$ and Sales indicate the size of the pharmacy can influence !

financial performance. To determine how a pharmacy’s ratios change as sales increase, we sorted the pharmacies into four separate groups based on their annual sales. n Less than $2.5 million n $2.5 million to $3.5 million

)

" to $6.5 million n $3.5 million ! n More than $6.5 million

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!!

!

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Pharmacies Have Higher Staff Cost Per Employee As Sales Grow

#

'!

The additional productivity comes at a higher cost. Median staff costs per employee for pharmacies with sales between $3.5 million and $6.5 million and sales over $6.5 million %! were the highest of all the sales categories. This is likely # due to the additional management and administrative staff "& required to operate larger pharmacies. #!

%

) #!!%

# Pharmacy Productivity Per Square Foot

'

"%

The three basic statements (common-sized [average] income statement, median financial benchmarks, and com% mon-sized balance sheet) for these sales categories appear in Tables 5, 6, and 7. This information shows some significant trends. Our observations follow. #

Productivity F_UVc #&> #&>

e`$&>

Sales Per Employee

$&> e`'&>

@gVc '&>

Pharmacies with sales between $3.5 and $6.5 million had the highest productivity, followed by pharmacies with sales over $6.5 million. This high employee productivity is a :_SP]Z[P]L_TYRPc[PY^P^ significant driver of the industry’s profitability.

!

Productivity of floor space increased substantially as sales $ increased. It is important for pharmacy owners to maximize # "$ their space to generate sales. # "#

'

%

"

Pharmacy Productivity per square foot " F_UVc #&>

Under

$2.5M to

$3.5M to

Over $6.5M

$2,687

$3,709

$4,543

$6,759

#&> $2.5M$&>$3.5M @gVc $6.5M e`$&> e`'&> '&>

Prescription sales per prescription square foot F_UVc

#&> e`$&> $66

#&> All other sales per nonprescription square foot

Average sales per square foot Average overall square feet

SALES PER EMPLOYEE

$&> e`'&> $81

;Ld]ZWWPc[PY^P^ $821 $1,138

#

@gVc

'&> $103

$1,395

$143 $1,838

2,622 2,844 4,345 ,aP]LRP:[P]L_TYR4YNZXP;P]NPY_LRP

5,656

STAFF COST PER EMPLOYEE

&!!!!!

" %!!!!!

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$

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#&> e`$&>

$&> e`'&>

@gVc '&>

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$!!!!

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#&> e`$&>

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@gVc '&>

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19

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Profitability "

The table below shows sales mix and gross margins for # pharmacies in the four sales categories. "

# Profitability

!

$2.5M to $3.5M

$3.5M to $6.5M

Over $6.5M

92.8%

93.9%

93.1%

93.4%

7.2%

6.1%

6.9%

6.6%

100%

100%

100%

100%

Average cost of goods sold

77.9%

75.9%

76.9%

76.9%

Average Gross Margin

22.1%

!" 24.1%

23.1%!! 23.1%

Prescription sales #

#

!

Under $2.5M

All other sales Total sales )

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!

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Expense Management The charts show how payroll expenses and other operating expenses change as sales increase. In 2008, the payroll expense (including owners) as a percentage of sales was ## highest in pharmacies with sales over $6.5 million. As payroll expenses increased to support the higher sales, the net operating income percentages decreased.

)!

! '!

#

PAYROLL EXPENSES

%!

#

"&

#!

#

"%

Sales mix between prescription sales and other sales varied among the sales groups; however, all pharmacies had greater than % 90 percent in prescription sales. The highest average "$ gross margins were earned by pharmacies with $2.5 million to $3.5 million in sales at 24.1 percent. While the margins are higher, since the volume is low, the net dollars to the # "# lower ! to " # pharmacy are significantly when compared larger pharmacies. It F_UVc is also important that pharmacies #&> to note $&> @gVc #&> e`$&> e`'&> '&> with sales less than $2.5 million have higher cost of goods sold and thus lower gross margins.

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#

F_UVc #&>

#&> e`$&>

$&> e`'&>

@gVc '&>

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Inventory turns increased as sales increased, with the pharmacies with sales more than $6.5 million being the most Pharmacies with sales more efficient at inventory control. % than $6.5 million turned their inventory the fastest, with stock staying on hand for only 28 days. Smaller pharmacies stock almost 43 per(having sales under $2.5 million) held &!!!!! $ cent longer for a total of 40 days. Efficient management of ! on$ prescription inventory had a significant impact the trend " of increasing overall inventory turnover as sales increased. %!!!!!

#

#

$!!!!! "

"

!#

F_UVc

#&>

Inventory turnover (annual) e`$&> 9.2 #!!!!! #&> Inventory turnover (days) 40 days

$2.5M to $3.5M

$&> 10.4 e`'&>

35 days

$3.5M to $6.5M

@gVc

10.8 '&> 34 days

Prescription inventory F_UVc 10.2 #&>10.8 $&> 12.7 turnover (annual) #&> e`$&> e`'&>

gVc &>

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"&

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!

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%

"$

#

"#

Inventory Control Under $2.5M

Over $6.5M

F_UVc #&>

12.9 28 days

#&> e`$&>

$&> e`'&>

@gVc '&>

13.5 @gVc '&>

Prescription inventory 36 days 34 days 29 days 27 days ,aP]LRP:[P]L_TYR4YNZXP;P]NPY_LRP turnover (days)

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20

2009 NCPA Digest, sponsored by Cardinal Health #

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&!!!!!

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!

$

#

#

##

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!

!

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In general, other operating expenses (overhead) ranged from 6.3 percent to 7.0 percent in the various sales categories, with the lowest sales category having the highest oper# ating expenses as a percent of sales. This observation is not surprising given the effect of fixed expenses. Fixed expenses do not grow in relation to sales. Instead, they stay the same as sales increase and over the long-term will stair-step up. As sales grow and costs stay the same, costs as a percentage of sales decrease. Again we find that as sales grow, companies may become less efficient as they step up their costs to support the larger pharmacies.

#

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Net Operating Income Before Tax The group of pharmacies with sales between $2.5 million

showed the highest net operating ! " and $3.5 million income

#

as a percentage of sales. For pharmacies with sales over $6.5 million, profits as a percentage of sales were lower due to higher payroll expenses and other operating expenses. However, their median net operating dollars were higher. AVERAGE NET OPERATING INCOME PERCENTAGE

%

)

"&

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!

$

!!

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%

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#

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#

"

" F_UVc #&>

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$&> e`'&>

@gVc '&>

F_UVc #&>

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@gVc '&>

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21

Tabl e 5 • 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales—By Sales Volume Under $2.5M

$2.5M to $3.5M

$3.5M to $6.5M

Over $6.5M

92.8%

93.9%

93.1%

93.4%

7.2%

6.1%

6.9%

6.6%

100%

100%

100%

100%

Prescriptions costs

73%

72.1%

72.5%

71.6%

All other costs

4.9%

3.8%

4.4%

5.3%


77.9%

75.9%

76.9%

76.9%

Gross Profit

22.1%

24.1%

23.1%

23.1%

11.2%

12%

11.6%

12.9%

Sales Prescription sales All other sales Total Sales

Cost of Goods Sold

Operating Expenses Payroll expenses Salaries, wages Payroll taxes, workers’ comp, employee benefits Payroll Expenses

1.6%

1.8%

1.8%

1.9%

12.8%

13.8%

13.4%

14.8%

Other Operating Expenses Advertising

0.5%

0.4%

0.5%

0.5%

Insurance

0.5%

0.3%

0.4%

0.3%


0.5%

0.4%

0.5%

0.5%

Office postage

0.1%

0.1%

0.1%

0.2%

Delivery service

0.2%

0.2%

0.2%

0.4%


0.5%

0.3%

0.4%

0.4%

Rent

1.4%

1.3%

1.1%

1.2%


0.6%

0.5%

0.4%

0.3%


2.7%

2.8%

3.1%

2.8%


7.0%

6.3%

6.7%

6.6%

19.8%

20.1%

20.1%

21.4%

2.3%

4.0%

3.0%

1.7%

Total Operating Expenses Net Operating Income

22


Tabl e 6 • 2008 Median Financial Benchmarks—By Sales Volume Under $2.5M

$2.5M to $3.5M

$3.5M to $6.5M

Over $6.5M

Profitability Ratios Net operating income percentage Net operating income dollars before tax

3.10%

3.80%

2.36%

2.34%

$53,473

$107,727

$99,916

$215,164

$363,048

$405,172

$423,564

$419,344

$36,552

$42,875

$44,945

$52,158

$2,687

$3,709

$4,543

$6,759

Productivity Ratios Sales per employee Staff costs per employee Prescription sales per square foot All other sales per square foot

$66

$81

$103

$143

$821

$1,138

$1,395

$1,838

$1,913,036

$2,968,396

$4,321,317

$8,253,056

Sales to assets

5.16

5.57

5.38

6.89


23%

25.9%

23.3%

25.9%

Debt to worth

0.37

0.46

0.48

0.58

Current ratio

4.09

3.45

3.89

2.79

Quick ratio

1.50

1.41

1.76

1.30

Total sales per square foot Median sales Financial Position Ratios

Cash Flow Ratios

Inventory turnover (annual) Inventory turnover (days)

9.2

10.4

10.8

12.9

40 days

35 days

34 days

28 days

10.2

10.8

12.7

13.5

Prescription inventory turnover (days)

36 days

34 days

29 days

27 days

Accounts receivable turnover (annual)

24

25.9

23.1

20.0

15 days

14 days

16 days

18 days

24.5

26.3

22.6

26.6

15 days

14 days

16 days

14 days

Prescription inventory turnover (annual)

Accounts receivable collection (days) Accounts payable turnover (annual) Accounts payable turnover (days)

Sales Volume Summary

23

Tabl e 7 • 2008 Common-Sized (Average) Balance Sheet, Percentage of Total Assets—By Sales Volume Under $2.5M

$2.5M to $3.5M

$3.5M to $6.5M

Over $6.5M

17.4%

19.5%

19.8%

14.5%

Accounts receivable

19.5%

20.4%

23.8%

30.9%

Inventory

44.4%

40.7%

37%

36%

Assets Current Assets Cash and cash equivalents


3.5%

7%

4.2%

5.5%


84.8%

87.6%

84.8%

86.9%

Net fixed assets

8.5%

8.3%

11.2%

9.7%

Other assets

6.7%

4.1%

4%

3.4%

Total Assets

100%

100%

100%

100%

6.8%

5.9%

5.1%

12.2%

Liabilities and Owners’ Equity Current Liabilities Notes payable (within one year) Accounts payable

12.5%

15.4%

18.4%

13.8%


5.2%

5.3%

3.7%

9.3%


24.5%

26.6%

27.2%

35.3%

Long-Term Liabilities

24

Notes payable to owner(s)

6.4%

11.8%

9.4%

3.1%


10.9%

15.7%

11%

7.1%


17.3%

27.5%

20.4%

10.2%

Total Liabilities

41.8%

54.1%

47.6%

45.5%


58.2%

45.9%

52.4%

54.5%


100%

100%

100%

100%


Cost of Dispensing One definition of “profit” is the monetary difference between what it costs to produce and sell a product and the revenue from its sale. In the pharmacy, knowing your cost of dispensing is an indispensable tool in maintaining or improving cash flow and profitability.

the prescription department, the cost of dispensing can be estimated. As previously stated, the cost to dispense a prescription is found by dividing the total cost of operating the prescription department by the total number of prescriptions dispensed.

To determine the cost of dispensing, the pharmacy owner or manager needs to conduct a departmental cost analysis that assigns direct costs and allocates indirect costs to the prescription department. The total cost allocated to the prescription department divided by the number of prescriptions dispensed is the average cost of dispensing. This average cost of dispensing is the average amount that it costs the pharmacy to dispense a prescription.

Analyses

Cost of Dispensing

Total annual costs allocated to prescription department

Total annual number of prescriptions dispensed

Cost of dispensing includes all direct costs (e.g., prescription bottles and labels, delivery service, and pharmacy computer expense) related to operating a prescription department and a share of the indirect costs. The share of indirect costs (e.g., rent, salaries, and advertising) is estimated by allocating a portion of the cost to the prescription department. There are multiple methods that can be used to allocate costs. Although there is no universally accepted method for allocating indirect costs, the basis of allocation should seem logical. In pharmacy, the following methods have been used to allocate indirect expenses:

We used the Digest data to calculate the cost of dispensing for 2008. It is important to note that this calculation only covers the cost of dispensing and does not include a profit. The 2009 Digest pharmacy’s cost of dispensing for all pharmacies is $11.01, up from $10.89 last year. Expenses increased as hourly wages increased, operating expenses increased, and pharmacists provided value-added services. The slight increase in prescription volume did not offset the increasing expenses; thus resulting in a slightly higher cost of dispensing for all pharmacies. The Top 25 percent had a lower cost of dispensing at $10.10 (compared to $11.01 for all pharmacies). We also calculated the cost of dispensing in various geographic regions, as shown in Figure 2. The Northeast region has the highest cost of dispensing at $12.83, and the East Central region has the lowest at $10.54. F i g u r e 2 • Cost of Dispensing—By Geographic Region $

#

n A percentage of prescription sales to total sales n A percentage of prescription department square feet to

total square feet n A percentage of prescription department inventory to

#

total inventory n A percentage of time the asset is used for the prescription

department activities to total time used Pharmacy owners and managers can select one method to use or they can use multiple methods to allocate indirect expenses. Having classified all costs that are associated with

Cost of Dispensing

25

If a pharmacy is to make a profit, the reimbursement rate or the price charged must cover the product cost, the cost of dispensing, plus a surplus for profit. Thus, for pharmacy owners and managers to make sound business decisions on whether to accept a contract or not, they need to know what it costs them to dispense a prescription. It is suggested that pharmacy owners estimate their own cost of dispensing and then carefully evaluate each third-party contract before signing. Additionally, all usual and customary charges should include the cost of dispensing, and pharmacy benefit managers should reimburse to cover cost of dispensing.

26


#!!(

Third-Party Prescriptions #!!)

The most significant external pressure on the business of independent community pharmacy is third-party prescription coverage and the plans that administer drug coverage, pharmacy benefit managers (PBMs). For community %)!!! pharmacies, public and private third-party payers dictate prescription drug reimbursement payments and intro ## duce additional operational and financial challenges to the %%!!! pharmacy. For most community pharmacies, achieving a and fair working relationship with# functional third- party ! payers is essential to attain long-term profitability and overall business survival. Table 8 provides the percent of third! %!!!! party activity as well as the average gross margin related to third-party plans.

Figure 3 • Third-Party Prescription

Activity—Five-Year Trend

"!!

)!

'!

%!

"#!

According to Figure 3, third-party activity increased to 88 percent of ,WW;SL]XLNTP^ the total prescription volume for the average ?Z[ ;P]NPY_ Digest pharmacy. Medicare Part D pays for approximately #!!' #!!( filled in independent #!!) 29.6 percent of the prescriptions community pharmacies. The percent covered by Medicaid decreased slightly to 14.5 percent. However, with nearly half of the prescriptions filled by independents being paid for >_LQQNZ^_^[P]PX[WZdPP by a government program, the reimbursement strategies of government programs significantly affect the financial viability of independent community pharmacy.

$'!!!

Prescriptions paid for by other third parties decreased to 43.7 percent, which is partially due to the shift of people to government programs like Medicaid and Medicare. It may also be due in part to independent community pharmacy owners rejecting contracts that do not reimburse pharmacists adequately for their time and service. Results for pharmacies that reported low (less than 80 percent), average (80–90 percent) and high (more than 90 percent) third-party prescription volume as a percentage of total prescriptions filled are contrasted in Tables 9, 10, and 11 on the pages that follow. Pharmacies with high third-party activity had higher median sales at $3,597,873 compared to $3,073,295 for companies with less than 80 percent of total prescriptions filled under third-party contract arrangements. These additional sales were at lower gross profit margins (22.8 percent compared to 25.2 percent for pharmacies with less than 80 percent third-party). Pharmacies with less than 80 percent third-party prescription sales had higher median net operating income percentages and more income dollars (before tax).

#!

!

#!!%

#!!&

#!!'

#!!(

#!!)

8POTNLTO 8POTNL]P;L]_/ 8POTNL]P/]`R/T^NZ`Y_.L]O :_SP]?ST]O;L]_d 9ZY?ST]O;L]_d

TA B LE 8 • Third-Party Prescription Activity 2006

2007

2008

15%

13.6%

14.5%

19.6%

20.3%

20.3%

Percentage of total prescriptions

24%

25.7%

29.6%

Average gross margin

16%

18.7%

18.5%

Percentage of total prescriptions

52%

48.1%

43.7%

Average gross margin

18.5%

19.1%

19.3%

Medicaid Percentage of total prescriptions Average gross margin Medicare Part D

Other third-party programs

Third-Party Prescriptions

27

TABL E 9 • 2008 Common-Sized (Average) Income Statement Percentage of Total Sales—By Third-Party Prescription Activity Less than 80% Third Party

80% to 90% Third Party

90% or more Third Party

93.2%

93.3%

93.4%

Sales Prescription sales All other sales

6.8%

6.7%

6.6%

Total Sales

100%

100%

100%

70.8%

72.4%

72.1%

Cost of Goods Sold Prescriptions costs

4%

4.2%

5.1%


74.8%

76.6%

77.2%

Gross Profit

25.2%

23.4%

22.8%

11.6%

11.7%

11.6%

All other costs

Operating Expenses Payroll expenses Salaries, wages

1.8%

1.8%

1.6%

13.4%

13.5%

13.2%

Advertising

0.5%

0.5%

0.5%

Insurance

0.5%

0.4%

0.4%


0.5%

0.5%

0.5%

Payroll taxes, workers’ comp, employee benefits Payroll Expenses Other Operating Expenses

Office postage

0.1%

0.1%

0.1%

Delivery service

0.4%

0.2%

0.2%


0.5%

0.4%

0.4%

Rent

1.2%

1.2%

1.2%


0.4%

0.4%

0.5%


3.7%

3.2%

2.9%


7.8%

6.9%

6.7%

21.2%

20.4%

19.9%

4.0%

3.0%

2.9%

Total Expenses Net Operating Income

28


Tabl e 10 • 2008 Median Financial Benchmarks—By Third-Party Prescription Activity Less than 80% Third Party




3.32%

2.80%

2.94%

$127,620

$83,565

$101,873

$385,184

$393,483

$424,282

$47,500

$39,696

$44,364

$3,900

$3,862

$3,631

Productivity Ratios Sales per employee Staff costs per employee Prescription sales per square foot Other sales per square foot

$72

$88

$86

$1,203

$1,302

$1,113

$3,073,295

$3,113,643

$3,597,873

Sales to assets

5.23

5.73

5.29


30%

21%

31.6%

Debt to worth

0.30

0.48

0.71

Current ratio

4.20

3.97

3.22

Quick ratio

2.07

1.57

1.56


Cash Flow Ratios


10.5

10.3

10.1

35 days

36 days

36 days


12.9

10.9

11.6


21.7

25.1

21.6

17 days

15 days

17 days


25.6

24.8

22.1

12 days

15 days

17 days


29

TABL E 11 • 2008 Common-Sized (Average) Balance Sheet Percentage of Total Assets—By Third-Party Prescription Activity Less than 80% Third Party



Assets Current Assets 8.9%

19.3%

14.6%

Accounts receivable

33.4%

22.8%

23.6%

Inventory

35.7%

39.4%

40.8%


5.4%

5.3%

3.7%


83.4%

86.8%

82.7%

Cash and cash equivalents

Net fixed assets

11.7%

8.9%

13.4%

Other assets

4.9%

4.3%

3.9%

Total Assets

100%

100%

100%

9.6%

7.4%

5.2%

13.9%

14.7%

17.8%

6.9%

3.8%

7.2%

30.4%

25.9%

30.2%

Liabilities and Owners’ Equity Current Liabilities Notes payable (within one year) Accounts payable Other current liabilities Total Current Liabilities Long-Term Liabilities Notes payable to owner(s)

3.8%

11.8%

6.6%


17.6%

9.8%

11%


21.4%

21.6%

17.6%

Total Liabilities

51.8%

47.5%

47.8%


48.2%

52.5%

52.2%


100%

100%

100%

Medicare Part D Prescriptions In 2006, independent community pharmacy experienced the introduction of Medicare Part D prescription coverage. Results are reported specific to the portion of prescriptions covered by Medicare Part D are presented in the following tables. Pharmacies were classified as less than 20 percent, 20 percent to 40 percent, and more than 40 percent Medicare Part D prescription volume as a percentage of total prescriptions. Results appear in Tables 12, 13, and 14 on the pages that follow.

30


Highlights of the Medicare Part D Prescriptions: n Unlike last year, for the average pharmacy, prescription

sales as a percentage of total sales did not increase along with the increase in percentage of prescriptions filled under Medicare Part D. n Median net operating income percentage was the lowest

at 2.47 percent for pharmacies with more than 40 percent of prescriptions covered by Medicare Part D. However, the lowest median net income dollars was for those with 20 percent to 40 percent covered under Medicare. n Median sales decrease as the percentage of Medicare

Part D prescriptions increase.

TABL E 12 • 2008 Common-Sized (Average) Income Statement Percentage of Total Sales—Portion of Prescriptions Covered By Medicare Part D Less than 20%

20% to 40%

More than 40%


93.2%

93.7%

93.5%

All other sales

6.8%

6.3%

6.5%

Total Sales

100%

100%

100%

72.5%

72.6%

71.1%


4.1%

4.4%

5.2%


76.6%

77%

76.3%

Gross Profit

23.4%

23%

23.7%

10.9%

12%

12.1%

All other costs

Operating Expenses Payroll expenses Salaries, wages Payroll taxes, workers’ comp, employee benefits

1.7%

1.7%

1.7%

12.6%

13.7%

13.8%

Advertising

0.5%

0.5%

0.4%

Insurance

0.4%

0.3%

0.4%


0.5%

0.4%

0.5%

Payroll Expenses Other Operating Expenses

Office postage

0.1%

0.1%

0.1%

Delivery service

0.3%

0.2%

0.4%


0.4%

0.4%

0.5%

Rent

1.4%

1.1%

1.0%


0.4%

0.4%

0.4%


3.1%

3%

3.4%


7.1%

6.4%

7.1%

19.7%

20.1%

20.9%

3.7%

2.9%

2.8%



31

TABL E 13 • 2008 Median Financial Benchmarks — Portion of Prescriptions Covered by Medicare Part D Less than 20%

20% to 40%

More than 40%


3.20%

2.91%

2.47%

$97,000

$79,880

$93,139

$410,263

$397,337

$406,989

$44,530

$40,240

$44,857

$4,600

$3,524

$4,262

Productivity Ratios Sales per employee Staff costs per employee Prescription sales per square foot All other sales per square foot

$91

$75

$105

$1,262

$1,061

$1,366

$3,425,369

$3,101,816

$3,099,307

Sales to assets

5.79

5.32

5.06


28%

17.4%

38%

Debt to worth

0.56

0.41

0.48

Current ratio

2.62

3.98

4.59

Quick ratio

1.13

1.77

2.08


Cash Flow Ratios


10.4

10.1

35 days

36 days


11.5

11.7

11.2


22.6

24.1

21.2

16 days

15 days

17 days


32

10.2 36 days


20.2

26.3

26.6

18 days

14 days

14 days

TABL E 14 • 2008 Common Sized (Average) Balance Sheet Percentage of Total Assets—By Prescriptions Covered By Medicare Part D Less than 20%

20% to 40%

More than 40%

Assets Current Assets Cash and cash equivalents

12.1%

18.7%

15.8%

Accounts receivable

26.3%

23%

27.3%

Inventory

40.7%

38.1%

38.6%


4.1%

4.3%

6.3%


83.2%

84.1%

88%

Net fixed assets

14.5%

11.3%

5.4%

Other assets

2.3%

4.6%

6.6%

Total Assets

100%

100%

100%

6.9%

4.8%

11.5%

20.6%

13.7%

12%

Liabilities and Owners’ Equity Current Liabilities Notes payable (within one year) Accounts payable Other current liabilities Total Current Liabilities

4.7%

6.6%

4.7%

32.2%

25.1%

28.2%

10.5%

10.1%

3.2%

Long-Term Liabilities Notes payable to owner(s) Other long-term liabilities

8.7%

14.3%

11.2%


19.2%

24.4%

14.4%

Total Liabilities

51.4%

49.5%

42.6%


48.6%

50.5%

57.4%


100%

100%

100%


33

Geographic Summary Conditions of the geographic region can influence operations of an independent community pharmacy, particularly in today’s economic times. To determine how pharmacies’ results differ by geographic region, we sorted the pharmacies into five regions. The three basic statements (common-sized income statement, median financial benchmarks, and common-sized balance sheet) for these geographical regions are contained in Tables 15, 16, and 17. n West (ak, az, ca, hi, id, nv, nm, or, ut, wa) n West-Central (ar, co, ia, ks, mn, mo, mt, ne, nd, ok, sd,

tx, wi, wy)

Hourly rates for staff pharmacists were highest for pharmacies in the West and Northeast.

Margins by Geographic Region West

WestCentral

EastCentral

Northeast

Southeast

Gross profit on prescription sales

24.2%

21.9%

22%

22.5%

22.3%

Gross profit on all other sales

33.8%

37.9%

43.1%

43.8%

28.6%

Overall Gross Profit Margin

24.9%

23.0%

23.4%

24.9%

22.6%

n East-Central (il, in, mi, oh, pa, wv) n Northeast (ct, de, dc, me, md, ma, nh, nj, ny, ri, vt, va) n Southeast (al, fl, ga, ky, la, ms, nc, sc, tn)

Median net operating income ranged by region from a high of 3.79 percent (in the West-Central region) to a low of 2.26 percent (in the West). High gross profit margin along with low operating costs drive the higher before-tax profits for the West-Central region. The West again had the highest median sales of any region at almost $4.6 million. Payroll expense (including owners) as a percentage of sales was the lowest in the Southeast region at 13.3 percent. The highest payroll costs were in the Northeast region at 15.0 percent. Pharmacies provided their average hourly rates of pay for their non-owner employees working as staff pharmacists, pharmacy technicians, and clerks. Average responses follow:

Average Hourly Rate of Pay for Pharmacy Positions West

34

WestCentral

EastCentral

Northeast

Southeast

Staff pharmacists

$56.21

$50.31

$47.94

$53.27

$51.16

Pharmacy technicians

$16.92

$12.78

$12.37

$13.69

$12.49

Sales clerks

$10.72

$9.56

$9.24

$10.47

$9.19


The West region and Northeast region had the highest overall gross profit margin at 24.9 percent driven by their strong margins on both prescription and other sales. The Southeast pharmacies had the lowest gross margin at 22.6 percent.

TABL E 15 • 2008 Common-Sized (Average) Income Statement

Percentage of Total Sales—By Geographic Region West

West-Central

East-Central

Northeast

Southeast

92.3%

93.4%

93.5%

88.8%

95.8%

Sales Prescription sales All other sales

7.7%

6.6%

6.5%

11.2%

4.2%

100%

100%

100%

100%

100%

Prescriptions costs

70%

72.9%

72.9%

68.8%

74.4%

All other costs

5.1%

4.1%

3.7%

6.3%

3%


75.1%

77%

76.6%

75.1%

77.4%

Gross Profit

24.9%

23%

23.4%

24.9%

22.6%

12.9%

11.6%

12.1%

12.8%

11.6%

Total Sales Cost of Goods Sold

Operating Expenses Payroll expenses Salaries, wages

2%

1.8%

1.8%

2.2%

1.7%

14.9%

13.4%

13.9%

15%

13.3%

Advertising

0.5%

0.6%

0.5%

0.2%

0.4%

Insurance

0.3%

0.4%

0.3%

0.4%

0.4%


0.7%

0.5%

0.3%

0.4%

0.4%

Payroll tax, workers’ comp, employee benefits Payroll Expenses Other Operating Expenses

Office postage

0.2%

0.1%

0.1%

0.2%

0.1%

Delivery service

0.3%

0.3%

0.3%

0.4%

0.2%


0.7%

0.4%

0.5%

0.3%

0.3%

1.6%

1.1%

0.3%

0.4%

Rent

1.4%

1.1%

1%


0.5%

0.4%

0.4%

All other operating expenses Total Other Operating Expenses Total Operating Expenses Net Operating Income

3%

3.2%

3.3%

2%

2.9%

7.6%

7%

6.7%

5.8%

6.2%

22.5%

20.4%

20.6%

20.8%

19.5%

2.4%

2.6%

2.8%

4.1%

3.1%

Geographic Summary

35

TABL E 16 • 2008 Median Financial Benchmarks—By Geographic Region West

West-Central

East-Central

Northeast

Southeast


2.26%

3.79%

2.43%

2.97%

2.30%

$110,222

$122,621

$78,000

$86,484

$54,030

Productivity Ratios $382,390

$404,531

$363,533

$415,113

$427,700

Staff costs per employee

Sales per employee

$47,143

$42,697

$41,032

$45,894

$44,528

Prescription sales per square foot

$4,932

$3,702

$3,786

$4,783

$3,223

Other sales per square foot

$111

$81

$104

$230

$62

$1,389

$1,102

$1,075

$1,698

$1,072

$4,588,675

$3,199,990

$3,671,317

$4,135,798

$2,846,299

6.04

5.06

5.16

6.56

5.82

26.6%

25.5%

15.6%

19.9%

17%

0.55

0.33

0.45

0.67

0.47

Current ratio

2.88

4.20

3.02

2.47

3.87

Quick ratio

1.05

1.82

1.57

1.28

1.48

Total sales per square foot Median sales Financial Position Ratios Sales to assets Return on investment Debt to worth Cash Flow Ratios


10.1

9.45

11.2

11.3

36 days

39 days

33 days

32 days


12.9

11.5

11.6

13

11.8


22.6

25.7

19.1

21.3

25.4

16 days

14 days

19 days

17 days

14 days 32.2 11 days


36

10.2 36 days

19.6

26.4

24.9

19

19 days

14 days

15 days

19 days


TABL E 17 • 2008 Common Sized (Average) Balance Sheet

Percentage of Total Assets—By Geographic Region West

West-Central

East-Central

Northeast

Southeast


12.9%

20.3%

16.1%

13.1%

19.3%

Accounts receivable

20.6%

21.8%

34.3%

27.8%

22.1%

Inventory

Assets Current Assets

42.4%

38.2%

34.7%

44%

37.1%


9%

5.1%

2.4%

7.6%

4.1%


84.9%

85.4%

87.5%

92.5%

82.6%

11.5%

10.4%

10.2%

2.4%

10.6%

Net fixed assets Other assets

3.6%

4.2%

2.3%

5.1%

6.8%

Total Assets

100%

100%

100%

100%

100%

Liabiities and Owners’ Equity Current Liabilities 7.8%

5%

13.2%

8.9%

7.1%

19.3%

13.6%

14.3%

23.1%

11.8%


2.3%

5.1%

7.3%

16%

4.9%


29.4%

23.7%

34.8%

48.0%

23.8%


4.9%

9.9%

4.2%

5.7%

13.3%


18.6%

14.5%

4%

12.8%

8%


23.5%

24.4%

8.2%

18.5%

21.3%

Notes payable (within one year) Accounts payable


Total Liabilities

52.9%

48.1%

43%

66.5%

45.1%


47.1%

51.9%

57%

33.5%

54.9%


100%

100%

100%

100%

100%

Geographic Summary

37

Rural/Metro Pharmacy Location Pharmacies defined their market type based upon the population of their region. The categories were: n Population less than 20,000

TA B LE 1 8 • 2008 Common-Sized (Average) Income Statement, Percentage of Total Sales— Metropolitan vs. Rural

n Population from 20,000 to 50,000 n Population more than 50,000

All other sales Total Sales

Population more than 50,000

92.8%

93.4%

93.4%

7.2%

6.6%

6.6%

100%

100%

100%

71.7%

70.7%

71.7%


The common-sized income statement shows that the pharmacies in areas with less than 50,000 people had lower gross margins than pharmacies in areas with a population greater than 50,000. These same pharmacies in areas with a population of less than 50,000 also experienced higher payroll expenses as a percentage of sales. This may be due to the pharmacist shortage, and pharmacies having to pay more to attract a pharmacist to rural areas. Because pharmacies in areas with population greater than 50,000 had higher gross margins and maintained their expenses, they had a greater average net operating income percentage at 3.9 percent.

Population of 20,000 to 50,000


Over 50 percent of independent community pharmacies are located in an area with a population of less than 20,000. Financial statements comparing pharmacies in these categories are provided in Tables 18, 19, and 20.

Population less than 20,000

4.6%

5.8%

4.1%


76.3%

76.5%

75.8%

Gross Profit

23.7%

23.5%

24.2%

11.8%

12.3%

11.7%

1.8%

1.9%

1.7%

13.6%

14.2%

13.4%

All other costs

Operating Expenses Payroll expenses Salaries, wages Payroll taxes, workers’ comp, employee benefits Payroll Expenses Other Operating Expenses

Median sales for pharmacies with populations over 50,000 were higher in the pharmacies in areas over 50,000 at $3,975,570. Yet with the median net operating income percentage, these pharmacies were able to earn $80,210 in median net operating income dollars before tax. Pharmacies in rural areas of less than 20,000 had median sales of $3,101,707 and earned $94,861 in median net operating income dollars before tax.

Advertising

0.5%

0.5%

0.4%

Insurance

0.4%

0.4%

0.4%


0.5%

0.4%

0.4%

Office postage

0.1%

0.1%

0.1%

Delivery service

0.2%

0.2%

0.5%


0.4%

0.4%

0.5%

Rent

1.2%

1.3%

1.2%


0.4%

0.4%

0.4%


3.1%

2.7%

3%


6.8%

6.4%

6.9%

20.4%

20.6%

20.3%

3.3%

2.9%

3.9%


38


TABL E 19 • 2008 Median Financial Benchmarks—Metropolitan vs. Rural Population less than 20,000




3.18%

1.68%

2.81%

$94,861

$63,574

$80,210

$399,625

$402,861

$397,476

$42,036

$42,300

$45,416

$3,733

$4,003

$3,697

$81

$103

$102

Productivity Ratios Sales per employee Staff costs per employee Prescription sales per square foot All other sales per square foot Total sales per square foot

$1,063

$1,624

$1,333

$3,101,707

$3,806,203

$3,975,570

5.29

5.29

6.14

25.4%

20.7%

16.3%

0.42

0.49

0.65

Current ratio

4.08

3.72

2.53

Quick ratio

1.78

1.77

1.14

Inventory turnover (annual)

10.1

10.7

10.5

36 days

34 days

35 days

11.6

12.1

12.2

Median sales Financial Position Ratios Sales to assets Return on investment Debt to worth Cash Flow Ratios

Inventory turnover (days) Prescription inventory turnover (annual) Accounts receivable turnover (annual) Accounts receivable collection (days) Accounts payable turnover (annual) Accounts payable turnover (days)

22.7

26.1

24.5

16 days

14 days

15 days

25.2

26.4

21.8

14 days

14 days

17 days

Rural/Metro Pharmacy Location

39

TABL E 20 • 2008 Common Sized (Average) Balance Sheet

Percentage of Total Assets—Metropolitan vs. Rural Population less than 20,000



Assets Current Assets 17.8%

17.4%

Accounts receivable

22.1%

24.3%

29.7%

Inventory

39.9%

40.7%

35.2%


4.4%

4.3%

6.8%


84.2%

86.7%

87.2%

Net fixed assets


15.5%

10.4%

9.7%

10.3%

Other assets

5.4%

3.6%

2.5%

Total Assets

100%

100%

100%

6.3%

4.1%

13.7%

14.3%

18.8%

13.9%

Liabilities and Owners’ Equity Current Liabilities Notes payable (within one year) Accounts payable Other current liabilities

4.2%

2.8%

10.5%


24.8%

25.7%

38.1%


10.2%

10.8%

4.1%


10.2%

11.9%

11.6%


20.4%

22.7%

15.7%

Total Liabilities

45.2%

48.4%

53.8%


54.8%

51.6%

46.2%


100%

100%

100%


40


Overview of Financial Statements and Performance Measures Financial Statements The information gathered in the survey is summarized and presented in three basic statements: n

Common-sized income statement—percent of total sales

n

Median financial benchmarks

n

Common-sized balance sheet—percent of total assets

What Is A Common-Sized Statement? Common-sizing financial statement information is a process by which each item on the financial statement is reduced to its relationship to the whole statement. For example, the average balance sheet presents each balance sheet item as a percentage of total assets. The average income statement presents each item as a percentage of total sales. The average common-sized statement is computed by determining an average value for the entire group of respondents. For example, when computing the average balance sheet, the cash balance of each pharmacy was totaled, and the assets of each pharmacy were totaled. Then total cash is divided by total assets to arrive at an average percentage of total assets for cash. Each item on the balance sheet gets totaled separately and its percent of total assets is computed in this manner. The result of this process is an average common-sized statement. Average values can be affected by one unusual pharmacy. This possibility should be considered when using average common-sized statements in the analysis process. Since each number is calculated separately as an average, the subtotals may not add up to the sum of the details due to rounding. This applies to both the common-sized income statements and the common-sized balance sheets.

Common-Sized Income Statement The income statement, also referred to as the profit and loss or P&L, measures the results of operations for a specific period of time (one year). The key financial issues relating to the income statement are pricing, gross margin maintenance, staff costs control, and operating expense control.

The common-sized income statement displays each item as a percentage of total sales. By focusing on the relationship to sales, this statement shows how much of each sales dollar is spent on the various expenses. For example, where cost of goods sold are 73.9 percent for every $1.00 in sales, about 74 cents (73.9 percent of $1.00) is spent on costs of goods, leaving 16 cents in gross profit to cover all other expenses and any profit for the owner. By using this average income statement, pharmacies with different sales volumes can be evaluated for profitability and expense control in common-sized or comparable terms.

Median Financial Benchmarks Financial statement information can be used to measure the health and progress of a business and the efficiency of its financial management. These measurements are quantified in standard financial benchmarks. A ratio is simply a comparison of one number to another. By comparing certain numbers from the financial statements, key financial issues can be evaluated, such as: a) efficiency in generating sales from assets, b) efficiency in generating profits from sales, or c) efficiency in structuring liabilities and net worth. For definitions and explanations of the financial operating ratios presented in this report, refer to the Guide to Benchmarking. The guide is specially designed as an educational companion piece to the 2009 NCPA Digest, sponsored by Cardinal Health. NCPA members can download a copy of the guide by visiting the NCPA website at www.ncpanet.org. The median is determined by computing the ratio for each pharmacy, and the results are ranked in order from highest to lowest. The ratio that falls in the exact middle of the list is at the median. The median is preferred to an average value, since it is not distorted by a few unusually high or low values. Median ratios are useful management information because they designate the “half-way point” of the respondents. Comparing an individual pharmacy’s ratio to the median reveals whether its performance places it in the top or bottom half of the sample for the specific condition being measured.

Overview of Financial Statements and Performance Measures

41

Common-Sized Balance Sheet The balance sheet represents the most important information about a business with respect to its financial health and its ability to continue operations. While the income statement measures performance for one year, the balance sheet displays the financial condition of the business after all its years of operations. The two sides of the balance sheet are: n Assets —what the business owns. n Liabilities and Net Worth —what the business owes (to

those who supplied the funds to buy the assets—the creditors and the owners). The key financial issues related to the balance sheet include solvency, liquidity, risk and efficiency of generating sales, profits and cash flow from assets.

Performance Measures Financial performance is measured by making comparisons between items found on the income statement or balance sheet, and sometimes by using other non-financial statistics. Comparing one number to another produces a ratio. This report contains a number of ratios designed to evaluate the financial health of a independent community pharmacy. For an explanation of how specific ratios are calculated and interpreted, refer to the Guide to Benchmarking. The Guide is designed to be an informative companion piece to the Digest and can be downloaded from the Digest section of the NCPA web site at www.ncpanet. org/members/digest.php. For purposes of this report, financial performance is measured in these four critical areas: n Profitability —gross profits, net profits, and expense control n Productivity —staff and facilities n Financial position —asset use and managing debt n Cash flow —managing the elements of the working

capital cycle Profitability —Efficiency in generating profits from sales

Savings through managing cost of goods sold fall straight to the bottom line as increased net profits. Other opportunities for increased profitability come from controlling payroll expenses, operating expenses, and interest expense. Benchmarks for measuring profitability include gross

42


profit margin and net operating income percentage. Expense controls improve profitability, so expenses and groups of expenses are also monitored (as a percentage of sales). The Digest’s reporting of profitability, both in percentage and dollars, is after compensation to owners but before tax. Productivity —Managing efficiency of staff and facilities

Maintaining reasonable levels of staff for a given sales volume and controlling payroll expenses represents a key area of financial efficiency. Optimum productivity is the result of efficiency in payroll expense control, balanced with effectiveness of staff ’s efforts. Staff cost per employee or as a percentage of sales are benchmarks for measuring cost efficiency. Sales per employee is a benchmark for measuring the effectiveness of staff efforts. Sales per square foot measures the productivity of facility space. Financial Position —Balance sheet management and

efficiency of generating sales and profits from your investment in assets Efficiency of asset use can be measured by comparing sales to assets. The return on investment ratios measure how efficiently the companies generate profit from the owners’ investment. Debt management is measured by the debt to worth ratio. Cash Flow Management —Managing the uses of cash and

liquid assets in the ongoing operations of the business Inventory, accounts receivable, and accounts payable problems are controllable, and management efficiencies in these areas can be measured. The common benchmarks for measuring these efficiencies are inventory turnover and turn days, accounts receivable turnover and turn days, and accounts payable turnover and turn days. The liquidity, or short-term solvency of the business, is measured by the current and quick ratios.

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