2 1 3 0 NCPA - National Community Pharmacists Association

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NCPA
FINANCIAL
Community Pharmacy in the Digital Age
NCPA Digest Sponsored
By Cardinal Health
National Community Pharmacists Association
The Voice of the Community Pharmacist
Project Editor
Donna West-Strum, RPh, PhD
Professor, Department of Pharmacy Administration
University of Mississippi
Oxford, Mississippi
Project Director and Financial Editor
Leon Michos, PhD
NCPA Health Care Economist
Creative
Robert Lewis
NCPA Creative/Design Director
Sarah Diab
NCPA Senior Design Consultant
Marianela Guinand
NCPA Junior Designer
Contributors
Chris Linville
NCPA Director and Managing Editor,
America’s Pharmacist
Copyright © 2013 National Community Pharmacists
Association, Alexandria, Virginia, USA. All rights
reserved. No right of reproduction without the
prior written consent of the National Community
Pharmacists Association.
2
2013 NCPA FINANCIAL DIGEST | Sponsored by Cardinal Health
Dear Valued NCPA Member
We are pleased to present you with the complete financial information of the 2013
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 4-13)
■ Ratios for "All Pharmacies" (Tables 4-13)
■ Ratios for pharmacies in your sales category (Tables 14-18)
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.
Step 4:Set goals for the year and develop a written action plan for achieving better
results.
Step 5:Implement your plan and monitor its progress. Review the plan monthly,
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.
1
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■
EXECUTIVE SUMMARY............................................pg. 4
■
METHODOLOGY. .......................................................pg. 8
■
OPERATING RESULTS...............................................pg. 9
■
SALES VOLUME SUMMARY. ..................................pg. 18
■
COST OF DISPENSING............................................pg. 23
■
GEOGRAPHIC SUMMARY......................................pg. 24
■
PHARMACY LOCATION..........................................pg. 28
■
VERVIEW OF FINANCIAL STATEMENTS AND
O
PERFORMANCE MEASURES..................................pg. 32
Table of Contents
■
FIGURES
1. B
reakdown by Sales Volume.............................. pg. 4
2. Average Annual Sales per Pharmacy Location,
10-Year Trend..................................................... pg. 5
3. Third-Party Prescriptions, 5 Year Trend. ..........pg.6
4. Distribution of Pharmacies over Time,
by Net profit...................................................................pg. 7
5. Distribution of Sales Revenue,
All Pharmacies. ............................................................pg. 9
6. D
istribution of Sales Revenue,
Top Performing Pharmacies....................................pg. 9
7. Payroll Expenses as a Percentage of Sales. .........pg. 11
8. Staff Costs per Employee...........................................pg. 11
9. S
ales per Employee, by Sales Volume. ..................pg. 18
10. Staff Costs per Employee, by Sales
Volume...........................................................................pg. 18
11. P
ayroll Expenses, by Sales Volume.....................pg. 19
12. O
ther Operating Expenses,
by Sales Volume. ........................................................pg. 19
13. Median Net Operating Income,
by Sales Volume..........................................................pg. 19
14. C
ost to Dispense,
by Geographic Location................................... pg. 23
■
TABLES
1. I ndependent Community Pharmacy,
At a Glance.....................................................................pg. 4
2. Averages of Pharmacy Operations,
10-Year Trend................................................................pg. 5
3. Viability of Independent Community
Pharmacy........................................................................pg. 6
4. Sales and Cost Mix, 3 Year trend
(All Pharmacies). ........................................................pg. 10
5. Sales and Cost Mix, 3 Year trend
(Top Performing Pharmacies)................................pg. 10
6. P
harmacy Staff Positions, 3 Year Trend.............pg. 11
7. Sales to Assets, 3 Year Trend (All Pharmacies
vs. Top Performing Pharmacies)............................pg. 12
8. Debt Management Ratios, 3 Year Trend
(All Pharmacies vs. Top Performing
Pharmacies)...................................................................pg. 12
9. C
ash Flow Ratios, 3 Year Trend (All Pharmacies vs.
Top Performing Pharmacies)............................ pg. 13
10. Inventory Control Ratios, 3 Year Trend
(All Pharmacies vs. Top Performing
Pharmacies).................................................................pg. 14
11. 2
012 Common-Sized (Average) Income Statement,
3 Year trend (All Pharmacies vs. Top Performing
Pharmacies).................................................................pg. 15
12. 2
012 Median Financial Benchmarks,
3 Year trend (All Pharmacies vs. Top Performing
Pharmacies). ...............................................................pg. 16
13. 2012 Common-Sized (Average) Balance Sheet,
3 Year Trend, (All Pharmacies vs. Top Performing
Pharmacies).................................................................pg. 17
14. P
rofitability, by Sales Volume...............................pg. 18
15. Inventory Control, by Sales Volume...................pg. 19
16. 2012 Common-Sized (Average) Income Statement,
17. 2
18. 2
012 Common-Sized (Average) Balance Sheet,
19. 2
012 Common-Sized (Average) Income
Statement Percentage of Total Sales, by Geographic
Region............................................................................pg. 25
20. 2
by Geographic Region..............................................pg. 26
21. 2
012 Common-Sized (Average) Balance Sheet
Percentage of Total Assets, by Geographic
Region............................................................................pg. 27
22. 2
012 Common-Sized (Average) Income Statement
Percentage of Total Sales—
Metropolitan vs. Rural............................................pg. 29
23. 2
by Population Density.............................................pg. 30
24. 2012 Common-Sized (Average) Balance Sheet,
by Population Density.............................................pg. 31
3
Executive Summary
The 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 2012.
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, longterm care (LTC), specialty, and supermarket pharmacies.
In 2012, fourteen percent of participating pharmacies had
total sales over $6.5 million, twenty-nine percent with
sales between $3.5 and $6.5 million, twenty percent with
sales between $2.5 and $3.5 million, and thirty-seven
percent with sales under $2.5 million.
TABLE 1: INDEPENDENT COMMUNITY PHARMACY,
AT A GLANCE
Year
2012
Average Number of Pharmacies In Which Each
Independent Owner Has Ownership
1.79
Value of Inventory As Cost and As A Percentage Of Sales
Prescription Inventory
$232,118 (6.0%)
Other Inventory
$39,642 (1.0%)
Total Inventory
$273,760 (7.0%)
Average Annual Rate of Inventory Turnover
10.8
Average Annual Rate of Prescription Inventory Turnover
12.6
Size of Area and Mean Sales Per Square Foot
FIGURE 1 : BREAKDOWN BY SALES VOLUME
Over $6.5
Million:14%
$2.5 Million
or Less: 37%
Prescription Sales Per Square Foot
979 Sq Ft ($3,582)
Other Sales Per Square Foot
2,126 Sq Ft ($163)
Total Sales Per Square Foot
3,105 Sq Ft ($1,241)
Number of Prescriptions Dispensed Per Pharmacy Location
$3.5 to $6.5
Million: 29%
$2.5 to $3.5 Million: 20%
New Prescriptions
29,555 (47%)
Renewed Prescriptions
33,028 (53%)
Total Prescriptions
62,583 (100%)
Average Prescription Charge
$56.04
Percentage of Total Prescriptions Covered By
In 2012 independent community pharmacy represented
an $88.7 billion marketplace, with ninety-one 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 controlling operating costs. In 2012 there were
4
Government Programs (Medicaid and Medicare Part D)
51%
Other Third-Party Programs
37%
Percentage of Prescriptions Dispensed Generic
77%
FIGURE 2 : AVERAGE ANNUAL SALES (IN THOUSANDS)
PER PHARMACY LOCATION, 10-YEAR TREND
2012
$3,854
2011
$3,831
2010
$4,022
2009
$4,026
2008
$3,881
2007
$3,604
2006
$3,612
2005
$3,745
2004
$3,580
2003
$3,244
23,029 independent community pharmacies providing
high quality services greatly valued by patients.
An overview of the average independent community
pharmacy is provided in “Independent Community
Pharmacy At A Glance.” In general, the average
independent community pharmacy location dispensed
62,583 prescriptions (201 per day based on a six day
week) in 2012. Total sales slightly increased this year as
pharmacists looked for other non-prescription products
and services to market. However, prescription sales
decreased slightly due to a decrease in prescription
volume, specifically refill prescriptions. The decrease
in refill prescriptions may be attributed to mandatory
mail order policies that some third-party payers have
implemented. These policies directly impact the
independent community pharmacy and the community
and state in which it operates. With prescription volume
slightly decreasing, community pharmacy owners
continue to monitor expenses.
Many independents continue to operate multiple
pharmacies. Twenty-five percent of independent
community pharmacy owners have ownership in two or
more pharmacies and the average number of pharmacies
in which each independent owner has ownership is 1.79.
The NCPA Digest, sponsored by Cardinal Health data
have been collected for over 80 years, providing an
opportunity to look at long-term trends for independent
community pharmacies. (Go to www.ncpanet.org for the
history of the Digest.) Gross margins fell in the 1990s and
since 2000 have remained relatively flat at twenty-two to
TABLE 2 : AVERAGES OF PHARMACY OPERATIONS, 10 YEAR TREND
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sales
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Cost of Goods Sold
76.0%
77.9%
76.4%
77.2%
76.8%
76.8%
76.2%
76.0%
77.1%
76.8%
Gross Profit
24.0%
22.1%
23.6%
22.8%
23.2%
23.2%
23.8%
24.0%
22.9%
23.2%
Payroll Expenses
13.2%
12.2%
13.4%
13.6%
13.7%
13.5%
14.1%
14.5%
13.4%
13.7%
Other Operating Expenses
6.8%
6.3%
6.5%
6.4%
6.5%
6.5%
6.4%
6.5%
6.6%
6.5%
Total Expense
20.0%
18.5%
19.9%
20.0%
20.2%
20.0%
20.5%
21.0%
20.0%
20.2%
Net Operating
4.0%
3.6%
3.7%
2.8%
3.0%
3.2%
3.3%
3.0%
2.9%
3.0%
5
FIGURE 3 : THIRD-PARTY PRESCRIPTIONS, 5-YEAR TREND
2012
0.18 (M)
0.33 (MD)
0.37 (O)
0.12 (N)
2011
0.17 (M)
0.32 (MD)
0.37 (O)
0.14 (N)
2010
0.16 (M)
0.30 (MD)
0.43 (O)
0.11 (N)
2009
0.13 (M)
0.30 (MD)
0.47 (O)
0.11 (N)
2008
0.14 (M)
0.30 (MD)
0.44 (O)
0.12 (N)
(M) MEDICAID; (MD) MEDICARE PART D;
(O) OTHER THIRD PARTY; (N) NON THIRD PARTY
TABLE 3: VIABILITY OF INDEPENDENT COMMUNITY
PHARMACY
Net Profit as
a Percent of Sales
Percentage of
Pharmacies
2012 Accumulated
Operating At a Loss
24.3%
24.3%
Less Than 2%
18.7%
43.0%
2% to 4%
15.5%
58.5%
4% to 6%
13.8%
72.3%
6% to 8%
11.2%
83.5%
8% and Over
16.5%
100%
■Payroll expenses, as a percentage of sales, increased
slightly from 13.4 percent in 2011 to 13.7 percent in
2012.
■Through attempts by independents to control
operating expenses, the average net operating income
remained similar to last year at three percent. Since
sales increased, the net operating income dollars
before tax increased slightly.
It is important to note that this year’s Digest data
reflect the marketplace in 2012, the seventh year for
the Medicare Part D prescription drug benefit program.
In 2012, thirty-three percent of prescriptions in
independent community pharmacies were covered by
Medicare Part D, up from thirty-two percent last year.
The number of prescriptions covered by Medicaid also
increased from seventeen percent to eighteen percent.
Thus, for the first time, government programs purchased
more than half of all prescriptions sold in independent
community pharmacies.
Independent community pharmacies are working hard to
improve their financial position. Historically, before the
implementation of Medicare Part D in 2006, an average
of 12.4 percent of independent community pharmacies
operated at a loss between 2001 and 2005. In 2006 the
profitability of pharmacies took a strong hit with 22.9
percent of independent community pharmacies operating
at a loss and over 1,100 pharmacies closing their
doors. In 2012, a significant proportion of independent
community pharmacies again were faced with financial
challenges, with over twenty percent operating at a loss.
This is most likely due to slim gross margins on thirdparty prescriptions and a decrease in prescription sales.
However, some pharmacies found opportunities and
were able to realize more than eight percent in net profit.
Independent community pharmacists are finding ways to
remain financially viable. For example, independents this
year controlled their operating expenses, increased the
use of technology, and obtained revenue from patient-care
services provided.
twenty-four percent. Average sales per pharmacy location
slightly increased this year, with a pharmacy location
now having over $3.8 million in sales on average.
■Average sales per location for 2012 was $3,854,158,
which is slightly up from 2011.
■Gross margin remained relatively stable at twenty-
three percent.
6
FIGURE 4 : DISTRIBUTION OF PHARMACIES OVER TIME,
BY NET PROFIT
2012
24.3 (L)
18.7 (0–2)
15.5 (2–4)
41.5 (4+)
2011
23.6 (L)
22.9 (0–2)
14.9 (2–4)
38.6 (4+)
2010
23.0 (L)
22.8 (0-2)
15.4 (2-4)
38.8 (4+)
2009
21.0 (L)
23.4 (0-2)
15.7 (2-4)
39.9 (4+)
2008
14.7 (L)
28.9 (0-2)
21.8 (2-4)
34.6 (4+)
2007
19.2 (L)
19.7 (0-2)
26.3 (2-4)
34.8 (4+)
2006
22.9 (L)
30.8 (0-2)
23.6 (2-4)
22.7 (4+)
2005
13.9 (L)
29.0 (0-2)
19.0 (2-4)
38.1 (4+)
2004
14.5 (L)
27.3 (0-2)
22.8 (2-4)
35.4 (4+)
(L) OPERATING AT A LOSS; (0-2) 0%–2%;
(2-4) 2%–4%; (4+) 4% OR MORE
7
Methodology
Independent community pharmacy owners, having
completed at least one entire year of operations, were
invited to participate in this study. Pharmacy owners or
their designees were asked to complete the surveys. 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 2012 portion of the study is based was from
fiscal years of Jan. 1, 2012 through July 15, 2013, with
ninety-nine percent of the responses reporting for the
year ending Dec. 31, 2012. Results from prior issues of
the Digest have been incorporated with the 2012 results
to facilitate assessing industry trends.
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
Common-sized (average) financial statements are
used to present the financial data in this report. The
common-sized 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 (midpoint) 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
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 2012, the various quartiles included pharmacies
achieving owner’s discretionary profit margins in the
following ranges:
Owner’s discretionary income (as a percentage
of total sales)
Top 25 percent
More than 10.2 percent
Third quartile
6.4 to 10.1 percent
Second quartile
2.3 to 6.3 percent
Bottom 25 percent
Less than 2.2 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.
8
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 11, 12, and
13, respectively. From these tables, we have provided a
summary of the results.
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 8.9 percent in net operating
income (compared to three percent, the average for
all pharmacies). Their profit advantage comes from
managing cost of goods sold, payroll expenses, and other
operating expenses.
FIGURE 5 : DISTRIBUTION OF SALES REVENUE,
ALL PHARMACIES
Payroll Expenses:13.7%
Other Operating
Expenses: 6.5%
Net Operating
Income: 3.0%
Cost of Goods
Sold: 76.8%
FIGURE 6 : DISTRIBUTION OF SALES REVENUE,
TOP PERFORMING PHARMACIES
HIGHLIGHTS
■ A
verage sales for all participating pharmacies
was 7.4 percent higher than sales for the Top
25 Percent. Thus the ability to maintain costs
and generate profits may be related to the
management of the pharmacy and less related
to sales volume.
■ Gross margin increased in 2012 to 23.2 percent
for all participating pharmacies. The Top 25
Percent also experienced a slight increase
in gross margin to 27.4 percent. The Top 25
Percent had higher gross margins than all
pharmacies (at 27.4 percent compared to 23.2
percent for all pharmacies).
■ Median net operating income percentage
increased, and the median net operating income
dollars for 2012 increased by approximately
$4,735. Likewise, the Top 25 Percent experienced
an increase in median net operating income.
■Return on investment for all pharmacies
increased to 20.2 percent in 2012. The same
trend was seen in the Top 25 Percent also.
Cost of Goods Sold: 72.6%
Payroll
Expenses:
13.0%
Other Operating
Expenses: 5.5%
■ F or all pharmacies, the current ratio and quick ratio
remained relatively the same. As in years past,
cash flow for pharmacies is sometimes difficult,
given the large percentage of prescriptions filled by
third-party payers. The Top 25 Percent experienced
the same trend.
Net Operating
Income: 8.9%
9
Gross Profit Margin
Over the past few years, gross profit margins have slightly
increased or decreased from year to year. For 2012, gross
profit margins increased by 0.3 percentage points. It
appears that independent community pharmacy owners
attempt to maintain a gross margin of 22 to 24 percent
in order to maintain their business. The Top 25 Percent
have a 4.2 percent gross profit advantage by managing
cost of goods sold and offering higher margin niche
services. Their gross profit margin was 27.4 percent
compared to 23.2 percent for all participating pharmacies.
We assessed the sales mix and gross profit margins for
prescriptions separate from other sales. Prescription sales
decreased for all pharmacies and increased for the Top
25 Percent. Other sales increased for all participating
pharmacies and the Top 25 Percent. Independent
community pharmacies continue to focus mainly on
prescriptions for the majority of their sales.
TABLE 4 : SALES AND COST MIX—3 YEAR TREND (ALL PHARMACIES)
Year
2010
2011
2012
Prescription Sales
$3,698,748
92.0%
$3,532,300
92.2%
$3,507,284
91.0%
All Other Sales
$323,707
8.0%
$299,181
7.8%
$346,874
9%
Total Sales
$4,022,455
100%
$3,831,481
100%
$3,854,158
100%
Cost of Goods Sold
$3,056,793
76.0%
$2,954,072
77.1%
$2,959,993
76.8%
Gross Profit Margin
$965,662
24%
$877,409
22.9%
$894,165
23.2%
TABLE 5 : SALES AND COST MIX—3 YEAR TREND (TOP PERFORMING PHARMACIES)
Year
2010
2011
2012
Prescription Sales
$3,263,152
93.4%
$3,244,801
92.6%
$3,287,769
91.6%
All Other Sales
$230,304
6.6%
$259,304
7.4%
$301,356
8.4%
Total Sales
$3,493,456
100%
$3,504,105
100%
$3,589,125
100%
Cost of Goods Sold
$2,534,458
72.5%
$2,554,493
72.9%
$2,605,705
72.6%
Gross Profit Margin
$958,998
27.5%
$949,613
27.1%
$983,420
27.4%
10
Operating Expense Management
TABLE 6 : PHARMACY STAFF POSITIONS, 3 YEAR TREND
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, containers and labels, delivery expenses, office
postage, pharmacy computer expense, rent, utilities and
telephone, and “all other operating expenses.” These are
the items frequently referred to as overhead expenses.
Payroll expenses, as a percentage of sales, increased
by 0.3 percentage points in 2012 to 13.7 percent.
The number of employees also slightly decreased in
2012 from 10.3 to 9.9 employees per location. Payroll
expenses increased slightly due to the slight increases
in wages paid. To recruit and retain quality employees,
independent community pharmacists continued to pay
competitive wages and benefits (e.g., life insurance,
health insurance) to pharmacists and technicians.
Year
2010
2011
2012
Non-owner Pharmacists
1.8
1.6
1.7
Technicians
3.8
3.7
3.7
Other Positions
3.9
3.8
3.1
Total Non-owner
Employees
9.5
9.1
8.5
Working Owners
Pharmacists and
Other Postions
1.1
1.2
1.4
Total Workforce
10.6
Full Time
Equivalent
10.3
Full Time
Equivalent
9.9
Full Time
Equivalent
Staff cost per employee represents, on average, the
amount of compensation, taxes and employee benefits
FIGURE 7 : PAYROLL EXPENSES AS A PERCENTAGE OF SALES
2012
13.7% (AP)
13.0% (TP)
2011
13.4% (AP)
12.9% (TP)
2010
14.5% (AP)
13.9% (TP)
(AP) ALL PHARMACIES; (TP) TOP 25 PERCENT
FIGURE 8 : STAFF COSTS PER EMPLOYEE
2012
$49,782 (AP)
$45,372 (TP)
2011
$47,152 (AP)
$44,221 (TP)
2010
$46,295 (AP)
$43,723 (TP)
paid during the year to each non-owner employee.
Independent community pharmacies paid median staff
costs increased to $49,782 per employee. Staff costs per
employee for the Top 25 Percent also increased slightly
in 2012. Staff costs per employee for the Top 25 Percent
were lower than the costs for all pharmacies at $45,372
(compared to $49,782 for all pharmacies).
Hourly wages for staff pharmacists and technicians
slightly increased in 2012. Staff pharmacist wages
increased to $54.15 and pharmacy technician wages
decreased to $13.90. Clerk/cashier wages decreased by
thirty cents per hour to $9.63.
Pharmacies reported the number of full-time equivalent
(FTE) employees working during the year. Average
responses showed staffing levels decreased. This may
be due to the decrease in sale and the necessity of
controlling employee costs. For purposes of this report,
each 2,080 hours of work is considered one FTE (fulltime equivalent) employee.
(AP) ALL PHARMACIES; (TP) TOP 25 PERCENT
11
Rent
Asset Efficiency Ratios
Rent is an important fixed cost for independent
community pharmacists. Total rent paid will vary from
pharmacy to pharmacy, depending on a number of factors
including the location of the pharmacy. For the average
independent community pharmacy, it costs $11.96 to
dispense a medication, of which 64 cents goes towards
paying rent.
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.
Typically, the amount paid in rent per square foot is
normally higher in more populated areas than in less
populated areas. The average rent paid per square foot
over an annual basis, is provided in the table below
broken down by the population of the town or city where
the pharmacy is located. The values below are rounded to
the nearest dollar.
$12
Local population from 20,000 to 50,000 people
$15
Local population over 50,000 people
$21
Median for All Pharmacies
Median for Top 25 Percent
2010
2011
2012
2010
2011
2012
$5.20
$5.00
$4.90
$5.64
$5.43
$5.59
For 2012, the median participant for all pharmacies
generated $4.90 in sales for every dollar invested in
assets. The Top 25 Percent’s sales to assets ratio of $5.59
indicates that they generated more sales for every dollar
invested in assets. Asset efficiency for all pharmacies
participating in the 2013 NCPA Digest, sponsored by
Cardinal Health was similar to 2011.
Average Rent Per Year Per Square Foot
Local population under 20,000 people.
TABLE 7 : SALES TO ASSETS, 3 YEAR TREND (ALL PHARMACIES
VS. TOP PERFORMING PHARMACIES)
Debt Management
Financial Position
Managing Assets and Controlling Debt
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 efficiency 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 forty cents as compared to forty-one cents for all
pharmacies. This year, the Top 25 Percent were similar in
risk compared to all pharmacies. The risk associated with
investing in an independent pharmacy appears comparable
to last year as measured by the debt to worth ratio.
Return on investment (ROI) increased in 2012 for
independent community pharmacies. For every dollar
owners invested, they earned 20.2 cents in net operating
TABLE 8 : DEBT MANAGEMENT RATIOS, 3 YEAR TREND (ALL PHARMACIES VS. TOP PERFORMING PHARMACIES)
Ratio
Computation
Debt to Worth
Return on Investment
Total Liabilities
Net Worth
Net Operating
Income
2010
2011
2012
2010
2011
2012
0.41
0.40
0.41
0.42
0.41
0.40
19.9%
19.1%
20.2%
49.0%
48.0%
50.0%
Net Worth
12
income, which is higher than 2011. The ROI for the
Top 25 Percent also increased in 2012 from forty-eight
percent to fifty percent. The return on investment ratio
for the Top 25 Percent shows that for every dollar the
owner has invested in the business, they earned about
fifty cents in net operating income after compensation to
owners but before tax. This compares to only 20.2 cents
for all pharmacies. Although the debt to worth ratio is
similar between all pharmacies and the Top 25 Percent,
the return on investment is greater in the Top 25 Percent.
This is due to their higher net profits.
Cash Flow
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 $4.67
in current assets on hand for every $1.00 in current
liabilities, and all pharmacies have $4.00 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 $2.49 in cash
and accounts receivable on hand for every $1.00 in
current liabilities compared to $1.66 for all pharmacies.
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 by inventory and accounts receivable or
provided by trade account creditors (vendors).
Inventory was held in stock for thirty-four days in 2012
which is two days shorter than in 2011. The accounts
receivable collection period decreased by one day to
fifteen days for all pharmacies. The Top 25 Percent
maintained their accounts receivable collection period at
fourteen days. 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
TABLE 9: CASH FLOW RATIOS, 3 YEAR TREND (ALL PHARMACIES VS. TOP PERFORMING PHARMACIES)
Year
2010
2011
2012
2010
2011
2012
Cash Flow Is Used For…
Inventory Turn Days
31 Days
34 Days
33 Days
30 Days
31 Days
31 Days
Accounts Receivable
Collection Period
15 Days
16 Days
15 Days
14 Days
14 Days
14 Days
For a Total of…
46 Days
50 Days
48 Days
44 Days
45 Days
45 Days
Cash Flow Is Provided By…
Accounts Payable
Payment Days
14 Days
14 Days
14 Days
12 Days
13 Days
13 Days
Net Days in Cycle
32 Days
36 Days
34 Days
32 Days
32 Days
32 Days
13
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.
medicines and other merchandise tend to turn more
slowly. Prescription stock stayed on hand for thirty-one
days (compared to thirty-three days for all inventory).
The Top 25 Percent maintained similar turnover rates
compared to all pharmacies.
Prescription inventory for all pharmacies turned
faster than the overall turnover of all merchandise
combined, as would be expected since over-the-counter
TABLE 10: INVENTORY CONTROL RATIOS, 3 YEAR TREND (ALL PHARMACIES VS. TOP PERFORMING PHARMACIES)
All Pharmacies
Top 25 Percent
Year
2010
2011
2012
2010
2011
2012
Inventory Turnover (Annual)
11.6
10.7
11.1
12.1
11.7
11.9
Inventory Turnover Days
31 Days
34 Days
33 Days
30 Days
31 Days
31 Days
Prescription Inventory Turnover
(Annual)
12.4
12.1
11.9
12.8
12.2
12.5
Turnover Days
29 Days
30 Days
31 Days
29 Days
30 Days
29 Days
14
TABLE 11: 2012 COMMON-SIZED (AVERAGE) INCOME STATEMENT, 3 YEAR TREND
(ALL PHARMACIES VS. TOP PERFORMING PHARMACIES)
All Pharmacies
Year
2010
2011
Top 25 Percent
2012
2012
Average ($)
2010
2011
2012
2012
Average ($)
Sales
Prescription sales
92.0%
92.2%
91.0%
$3,507,284
93.4%
92.6%
91.6%
$3,287,769
All other sales
8.0%
7.8%
9.0%
$346,874
6.6%
7.4%
8.4%
$301,356
Total Sales
100%
100%
100%
$3,854,158
100%
100%
100%
$3,589,125
Cost of Goods Sold
Prescriptions Costs
70.5%
71.9%
71.0%
$2,737,994
68.0%
68.7%
68.3%
$2,451,372
All Other Costs
5.5%
5.2%
5.8%
$222,000
4.5%
4.2%
4.3%
$154,332
Total Cost of Goods Sold
76.0%
77.1%
76.8%
$2,959,993
72.5%
72.9%
72.6%
$2,605,705
Gross Profit
24.0%
22.9%
23.2%
$894,165
27.5%
27.1%
27.4%
$983,420
Payroll Expenses
Salaries, Wages
12.5%
11.2%
11.4%
$439,374
12.4%
11.3%
11.4%
$409,160
Payroll Taxes, Workers’ Comp,
Employee Benefits
2.0%
2.2%
2.3%
$88,646
1.5%
1.6%
1.6%
$57,426
Total Payroll Expenses
14.5%
13.4%
13.7%
$528,020
13.9%
12.9%
13.0%
$466,586
Advertising
0.5%
0.4%
0.4%
$15,416.63
0.4%
0.4%
0.4%
$14,357
Insurance
0.3%
0.4%
0.3%
$11,562.47
0.3%
0.3%
0.3%
$10,767
Store Supplies,
Containers, Labels
0.5%
0.4%
0.4%
$15,416.63
0.5%
0.4%
0.4%
$14,357
Pharmacy Computer Expense
0.4%
0.5%
0.3%
$11,562.47
0.4%
0.4%
0.3%
$10,767
Rent
1.2%
1.3%
1.4%
$53,958.21
0.9%
1.0%
1.0%
$35,891
Utilities, Telephone
0.4%
0.4%
0.4%
$15,416.63
0.4%
0.4%
0.3%
$10,767
All Other Operating Expenses
2.7%
3.2%
3.3%
$127,187.21
1.8%
2.8%
2.8%
$107,916.42
Total Other
Operating Expenses
6.5%
6.6%
6.5%
$252,888
5.3%
5.7%
5.5%
$197,402
Total Operating Expenses
21.0%
20.0%
20.2%
$766,296
19.2%
18.6%
18.5%
$663,988
Net Operating Income
3.0%
2.9%
3.0%
$115,624.74
8.3%
8.5%
8.9%
$319,432
15
TABLE 12: 2012 MEDIAN FINANCIAL BENCHMARKS, 3 YEAR TREND (ALL PHARMACIES VS. TOP PERFORMING PHARMACIES)
All Pharmacies
Year
2010
2011
Top 25 Percent
2012
2010
2011
2012
Profitability Ratios
Percentage
Net Operating Income Dollars
Before Tax
Net Profit Before Tax
Sales
Net Profit Before Tax
2.9%
2.7%
2.9%
6.3%
6.5%
6.7%
$92,340
$91,110
$95,845
$182,353
$192,450
$201,150
Productivity Ratios
Sales Per Employee
Staff Costs Per Employee
Prescription Sales Per Square
Foot
All Other Sales Per Square
Foot
Median Sales
Sales
# Of Employees Incl. Owners
Non-Owner Wage, Tax,
Benefits
# Of Employees Excluding
Owners
Prescription Sales
Prescription Dept. Square Feet
$467,375
$473,424
$498,374
$451,686
$458,763
$461,863
$46,295
$47,152
$49,782
$43,723
$44,221
$45,372
$3,310
$3,266
$3,021
$3,390
$3,314
$3,103
$138
$136
$124
$149
$143
$136
$1,168
$1,151
$1,019
$1,273
$1,207
$1,059
$3,173,301
$3,374,444
$3,305,000
$2,910,532
$2,960,800
$3,002,248
All Other Sales
Square Feet Excluding
Prescription Dept.
Total Sales
Square Feet
Group Middle Point
Financial Position Ratios
Sales
Sales to Assets
Total Assets
Dollars
5.20
5.00
4.9
5.64
5.43
5.59
19.9%
19.1%
20.2%
49.0%
48.0%
50.0%
0.41
0.40
0.41
0.42
0.41
0.40
Net Worth
Total Liabilities
Debt to Worth
Net Worth
Cash Flow Ratios
Current Assets
Current Ratio
Current Liabilities
Cash + Accounts Receivable
Quick Ratio
Current Liabilities
Inventory Turnover (Days)
Turnover
Turnover (Days)
Cost of Goods Sold
Inventory
365
Inventory Turnover
Prescription Cost
of Goods Sold
Credit Sales
Accounts Receivable
Collection (Days)
Accts Receivable Turnover
16
4.00
4.78
4.71
4.67
1.71
1.62
1.66
2.51
2.42
2.49
11.6
10.7
11.1
12.1
11.7
11.9
31 Days
34 Days
33 Days
30 Days
31 Days
31 Days
12.4
12.1
11.9
12.8
12.2
12.5
29 Days
30 Days
31 Days
29 Days
30 Days
29 Days
24.5
23.1
23.7
26.3
25.7
26.1
15 Days
16 Days
15 Days
14 Days
14 Days
14 Days
26.73
25.2
25.8
29.6
28.3
28.9
14 Days
14 Days
14 Days
12 Days
13 Days
13 Days
365
Turnover
Accounts Receivable
Accounts Payable Turnover
(Days)
3.90
Accounts Receivable
Turnover (Annual)
Accounts Payable
Turnover (Annual)
4.10
365
Cost Of Goods Sold
Accounts Payable
365
Accounts Payable Turnover
TABLE 13: 2012 COMMON-SIZED (AVERAGE) BALANCE SHEET, 3 YEAR TREND,
(ALL PHARMACIES VS. TOP PERFORMING PHARMACIES)
Assets
All Pharmacies
2010
2011
Top 25 Percent
2012
2010
2011
2012
Current Assets
Cash and Cash Equivalents
16.5%
16.1%
15.9%
23.7%
22.9%
23.5%
Accounts Receivable
21.4%
21.7%
21.2%
19.9%
19.1%
18.9%
Inventory
32.8%
31.9%
32.5%
31.3%
31.7%
32.4%
Other Current Assets
11.7%
11.3%
11.6%
12.4%
11.9%
12.1%
Total Current Assets
82.3%
81.0%
81.2%
87.3%
85.6%
86.9%
Net Fixed Assets
12.6%
13.4%
13.6%
8.9%
9.9%
9.0%
Other Assets
5.1%
5.6%
5.2%
3.8%
4.5%
4.1%
Total Assets
100%
100%
100%
100%
100%
100%
Liabilities And Owners’ Equity
Current Liabilities
Notes Payable (Within One Year)
5.2%
5.6%
5.5%
3.3%
3.9%
3.5%
Accounts Payable
14.3%
14.7%
14.9%
8.8%
9.3%
8.9%
Other Current Liabilities
6.0%
6.4%
6.2%
3.9%
4.0%
4.1%
Total Current Liabilities
25.5%
26.7%
26.6%
16.0%
17.2%
16.5%
Long Term Liabilities
Notes Payable to Owner(s)
9.7%
8.9%
9.3%
7.1%
7.6%
7.8%
Other Long Term Liabilities
16.6%
17.1%
16.9%
14.3%
13.9%
13.3%
Total Long Term Liabilities
26.3%
26.0%
26.2%
21.4%
21.5%
21.1%
Total Liabilities
51.8%
52.7%
52.8%
37.4%
38.7%
37.6%
Total Owners’ Equity
48.2%
47.3%
47.2%
62.6%
61.3%
62.4%
Total Liabilities and Owners’ Equity
100%
100%
100%
100%
100%
100%
17
Sales Volume Summary
FIGURE 10 : STAFF COSTS PER EMPLOYEE, BY SALES VOLUME
Sales Volume Summary
Sales indicate the size of the pharmacy and 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.
■Less than $2.5 million
■$2.5 million to $3.5 million
■$3.5 million to $6.5 million
■More than $6.5 million
The three basic statements (common-sized [average]
income statement, median financial benchmarks, and
common-sized balance sheet) for these sales categories
appear in Tables 16–18. This information shows some
significant trends. Our observations follow.
Under $2.5M
$40,651
$2.5M to $3.5M
$45,043
$3.5M to $6.5M
$52,347
Over $6.5M
$55,036
Profitability
Productivity
Sales Per Employee
The table below shows sales mix and gross margins for
pharmacies in the four sales categories.
Pharmacies with sales over $6.5 million had the highest
productivity, followed by pharmacies between $3.5 and
$6.5 million in sales. This high employee productivity is
a significant driver of the industry’s profitability.
Pharmacies Have Higher Staff Cost Per
Employee As Sales Grow
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.
FIGURE 9 : SALES PER EMPLOYEE, BY SALES VOLUME
Under $2.5M
$314,042
$2.5M to $3.5M
$441,424
$3.5M to $6.5M
Over $6.5M
18
$484,394
Sales mix between prescription sales and other sales
varied among the sales groups; however, all pharmacies
had ninety percent or more in prescription sales. The
highest average gross margins were earned by pharmacies
with sales between $3.5 to $6.5 million and with sales
over $6.5 million. These pharmacies had gross margin
percentages at twenty-four percent or greater. Because the
volume is higher in stores with sales over $6.5 million in
sales, the net operating income dollars to the pharmacy
are significantly higher compared to other pharmacies.
These larger pharmacies gain efficiencies with respect to
cost of goods sold and expenses.
TABLE 14: PROFITABILITY, BY SALES VOLUME
Under
$2.5M
$2.5M to
$3.5M
$3.5M to
$6.5M
Over
$6.5M
Prescription Sales
92.0%
91.5%
90.4%
90.0%
All Other Sales
8.0%
8.5%
9.6%
10.0%
Total Sales
100%
100%
100%
100%
Average Cost of
Goods Sold
77.6%
78.0%
76.0%
75.7%
Average Gross
Margin
22.4%
22.0%
24.0%
24.3%
$507,461
Inventory Control
Inventory turns increased as sales increased, with the
pharmacies with sales over $6.5 million being the most
efficient at inventory control. Pharmacies with sales over
$6.5 million turned their inventory the fastest, with
stock staying on hand for only thirty-one days. Smaller
pharmacies (having sales under $2.5 million) held stock
over twenty-five percent longer for a total of thirty-nine
days. Efficient management of inventory had a significant
impact on the trend of increasing overall inventory turnover as sales increased.
FIGURE 12 : OTHER OPERATING EXPENSES, BY SALES VOLUME
Under $2.5M
6.3%
$2.5M to $3.5M
6.2%
$3.5M to $6.5M
6.7%
Over $6.5M
6.6%
TABLE 15: INVENTORY CONTROL, BY SALES VOLUME
Under
$2.5M
$2.5M to
$3.5M
$3.5M to
$6.5M
Over
$6.5M
Inventory Turnover
(Annual)
9.3
10.4
11.5
11.8
Inventory Turnover
(Days)
39 days
35 days
32 days
31 days
Turnover (Annual)
10.4
11.3
12.0
12.7
Turnover (Days)
35 days
32 days
30 days
29 days
Net Operating Income Before Tax
The group of pharmacies with sales between $2.5 million
and $3.5 million showed the lowest net operating income
as a percentage of sales. For pharmacies with sales
between $3.5 and $6.5 million and those pharmacies
with sales over $6.5 million, profits before taxes were
higher due to high gross profit percentage and lower
payroll expenses, as a percentage of sales.
Expense Management
The charts show how payroll expenses and other operating
expenses change as sales increase. Similar to last year,
the payroll expense (including owners) as a percentage of
sales was highest in pharmacies with sales less than $2.5
million in sales and in pharmacies with sales between $2.5
and $3.5 million in sales. This high payroll expense for
these pharmacies resulted in less net operating income.
In general, other operating expenses (overhead) ranged
from 6.2 percent to 6.7 percent in the various sales
categories. Other operating expenses as a percentage of
sales decreased in all categories in 2012.
FIGURE 13 : MEDIAN NET OPERATING INCOME,
BY SALES VOLUME
Under $2.5M
2.6%
$2.5M to $3.5M
2.5%
$3.5M to $6.5M
3.0%
Over $6.5M
3.0%
FIGURE 11 : PAYROLL EXPENSES, BY SALES VOLUME
Under $2.5M
14.0%
$2.5M to $3.5M
14.0%
$3.5M to $6.5M
12.9%
Over $6.5M
12.7%
19
TABLE 16: 2012 COMMON-SIZED (AVERAGE) INCOME STATEMENT, BY SALES VOLUME
Under $2.5M
$2.5M to $3.5M
$3.5M to $6.5M
Over $6.5M
Sales
Prescription Sales
92.0%
91.5%
90.4%
90.0%
All Other Sales
8.0%
8.5%
9.6%
10.0%
Total Sales
100%
100%
100%
100%
Cost of Goods Sold
Prescriptions Costs
71.7%
72.1%
70.8%
70.2%
All Other Costs
5.9%
5.9%
5.2%
5.5%
77.6%
78.0%
76.0%
75.7%
Gross Profit
22.4%
22.0%
24.0%
24.3%
Payroll Expenses
Salaries, Wages
11.7%
11.6%
10.9%
10.7%
Payroll Taxes, Workers’ Comp, Employee Benefits
2.3%
2.4%
2.0%
2.0%
14.0%
14.0%
12.9%
12.7%
20
Advertising
0.3%
0.3%
0.4%
0.5%
Insurance
0.3%
0.4%
0.3%
0.4%
Store Supplies, Containers, Labels
0.4%
0.4%
0.3%
0.3%
0.4%
0.4%
0.3%
0.3%
Rent
1.5%
1.4%
1.3%
1.2%
0.4%
0.4%
0.4%
0.4%
3.0%
2.9%
3.7%
3.5%
Total Other Operating Expenses
6.3%
6.2%
6.7%
6.6%
20.3%
20.2%
19.6%
19.3%
2.1%
1.8%
4.4%
5.0%
TABLE 17: 2012 MEDIAN FINANCIAL BENCHMARKS, BY SALES VOLUME
Under $2.5M
$2.5M to $3.5M
$3.5M to $6.5M
Over $6.5M
Net Operating Income Percentage
2.6%
2.5%
3.0%
3.0%
Net Operating Income Dollars Before Tax
$44,900
$69,427
$94,281
$215,162
Productivity Ratios
Sales Per Employee
$314,042
$441,124
$484,394
$507,461
$40,651
$45,043
$52,347
$55,036
$1,894
$2,367
$3,045
$4,251
All Other Sales Per Square Foot
$75
$112
$131
$137
$692
$1,038
$1,236
$1,577
Median Sales
$1,796,000
$2,892,792
$3,251,069
$7,172,067
Sales to Assets
4.61
5.23
4.72
5.31
17.9%
16.1%
25.0%
23.8%
Debt to Worth
0.35
0.35
0.44
0.48
Cash Flow Ratios
Current Ratio
3.8
4.0
4.4
4.0
Quick Ratio
1.6
1.8
1.9
1.6
9.3
10.4
11.5
11.8
39 Days
35 Days
32 Days
31 Days
Prescription Inventory Turnover (Annual)
10.4
11.3
12.0
12.7
Prescription Inventory Turnover (Days)
35 Days
32 Days
30 Days
29 Days
Accounts Receivable Turnover (Annual)
24.2
24.3
22.6
21.8
Accounts Receivable Collection (Days)
15 Days
15 Days
16 Days
17 Days
Accounts Payable Turnover (Annual)
25.3
29.6
24.2
24.3
Accounts Payable Turnover (Days)
14 Days
12 Days
15 Days
15 Days
21
TABLE 18: 2012 COMMON-SIZED (AVERAGE) BALANCE SHEET, BY SALES VOLUME
Under $2.5M
$2.5M to $3.5M
$3.5M to $6.5M
Over $6.5M
Assets
Current Assets
Cash and Cash Equivalents
16.8%
15.5%
15.2%
17.3%
Accounts Receivable
19.2%
20.8%
21.3%
21.5%
Inventory
34.1%
33.7%
31.5%
31.1%
11.9%
10.9%
11.8%
11.2%
82.0%
80.9%
79.8%
81.1%
Net Fixed Assets
12.2%
11.9%
13.9%
14.4%
Other Assets
5.8%
7.2%
6.3%
4.5%
Total Assets
100%
100%
100%
100%
Liabilities And Owners’ Equity
Current Liabilities
5.8%
5.7%
5.4%
5.3%
Accounts Payable
13.6%
14.5%
14.6%
14.1%
6.1%
6.5%
6.5%
5.9%
25.5%
26.7%
26.5%
25.3%
22
11.5%
9.5%
8.7%
8.4%
16.6%
17.5%
17.1%
16.9%
28.1%
27.0%
25.8%
25.3%
Total Liabilities
53.6%
53.7%
52.3%
50.6%
46.4%
46.3%
47.7%
49.4%
100.0%
100.0%
100.0%
100.0%
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.
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.
Cost of Dispensing Formula
Cost of dispensing
= Total annual costs allocated to prescription department
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.
2013 NCPA Digest, sponsored by Cardinal Health
Analyses
We used the Digest data to calculate the cost of dispensing
for 2012. It is important to note that this calculation only
covers the cost of dispensing and does not include a profit.
The 2013 Digest pharmacy’s cost of dispensing for all
pharmacies is $11.96, down from $12.19 last year. Expenses
decreased as FTEs decreased and overall operating expenses
were reduced. We also calculated the cost of dispensing
in various geographic regions, as shown in Figure 3. The
Northeast region has the highest cost of dispensing at
$13.75, and the East-Central region has the lowest at $11.17.
Cost of dispensing remained relatively the same as last year
in all regions, just slightly decreasing.
FIGURE 14 : COST TO DISPENSE, BY GEOGRAPHIC LOCATION
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:
■A percentage of prescription sales to total sales
■A percentage of prescription department square feet
to total square feet
■A percentage of prescription department inventory to
total inventory
■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 the prescription department, the cost of dispensing
West
■
West-Central
■
East-Central
■
Northeast
■
Southeast
$11.17
$13.75
$12.17
$12.28
$11.38
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.
23
Geographic
Summary
Conditions of the geographic region can influence operations
of an independent community pharmacy, particularly in today’s
economy. 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 19, 20, and 21.
■West (AK, AZ, CA, HI, ID, NV, NM, OR, UT, WA)
■West-Central (AR, CO, IA, KS, MN, MO, MT, NE, ND, OK,
SD, TX, WI, WY)
■East-Central (IL, IN, MI, OH, PA, WV)
■
Northeast (CT, DE, DC, ME, MD, MA, NH, NJ, NY, RI, VT, VA)
■Southeast (AL, FL, GA, KY, LA, MS, NC, SC, TN)
Median net operating income ranged by region from a high of
3.0 percent (in the West region) to a low of 2.5 percent (in EastCentral). This is similar to last year. The East-Central region had
the highest median sales of any region at over $3.5 million.
TABLE 19: 2012 COMMON-SIZED (AVERAGE) INCOME STATEMENT PERCENTAGE OF TOTAL SALES, BY GEOGRAPHIC REGION
West
West-Central
East-Central
Northeast
Southeast
Sales
Prescription Sales
91.9%
91.2%
91.0%
90.6%
92.3%
All Other Sales
8.1%
8.8%
9.0%
9.4%
7.7%
Total Sales
100%
100%
100%
100%
100%
Cost of Goods Sold
Prescriptions Costs
69.3%
71.0%
71.2%
71.1%
72.5%
All Other Costs
5.6%
5.2%
5.4%
6.4%
5.3%
74.9%
76.2%
76.6%
77.5%
77.8%
Gross Profit
25.1%
23.8%
23.4%
22.5%
22.2%
Payroll Expenses
Salaries, Wages
12.0%
11.7%
11.4%
11.2%
11.0%
Payroll Tax, Workers’ Comp,
Employee Benefits
2.2%
2.2%
2.4%
2.0%
2.0%
14.2%
13.9%
13.8%
13.2%
13.0%
Advertising
0.0%
0.0%
0.4%
0.5%
0.4%
Insurance
0.4%
0.3%
0.3%
0.3%
0.3%
0.5%
0.5%
0.5%
0.6%
0.5%
0.4%
0.3%
0.3%
0.4%
0.3%
Rent
1.5%
1.4%
1.4%
1.3%
1.2%
0.4%
0.4%
0.4%
0.4%
0.4%
3.7%
3.4%
3.2%
2.9%
3.2%
6.9%
6.3%
6.5%
6.4%
6.3%
21.1%
20.2%
20.3%
19.6%
19.3%
4.0%
3.6%
3.1%
2.9%
2.9%
25
TABLE 20: 2012 MEDIAN FINANCIAL BENCHMARKS, BY GEOGRAPHIC REGION
West
West-Central
East-Central
Northeast
Southeast
3.0%
2.8%
2.5%
2.8%
2.7%
$96,879
$94,968
$88,592
$95,022
$96,519
Productivity Ratios
Sales Per Employee
$444,966
$481,063
$484,583
$482,158
$456,083
$53,931
$57,002
$36,351
$54,595
$38,687
$3,063
$3,895
$3,696
$3,420
$3,105
Other Sales Per Square Foot
$150
$99
$128
$149
$106
$1,320
$549
$953
$1,495
$1,132
Median Sales
$3,229,300
$3,391,714
$3,543,680
$3,393,643
$3,447,107
Sales to Assets
4.82
4.71
4.18
5.49
5.27
21.1%
21.9%
19.5%
19.3%
19.4%
Debt to Worth
0.39
0.42
0.46
0.47
0.35
Cash Flow Ratios
Current Ratio
4.1
3.6
3.6
4
4
Quick Ratio
1.8
1.4
1.7
1.4
1.7
11.3
8.6
11.1
11.2
10.9
32 Days
42 Days
33 Days
33 Days
33 Days
11.8
11.6
12.0
11.8
11.2
31
31
30
31
33
24 Days
24 Days
23 Days
22 Days
23 Days
15
15
16
17
15
27 Days
23 Days
24 Days
26 Days
27 Days
26
TABLE 21: 2012 COMMON-SIZED (AVERAGE) BALANCE SHEET PERCENTAGE OF TOTAL ASSETS, BY GEOGRAPHIC REGION
West
West-Central
East-Central
Northeast
Southeast
Assets
Current Assets
Cash And Cash Equivalents
17.9%
15.9%
16.2%
15.7%
16.3%
Accounts Receivable
18.3%
19.8%
22.1%
22.6%
20.7%
Inventory
32.7%
32.8%
31.9%
32.5%
31.6%
11.8%
11.7%
11.5%
11.2%
11.4%
80.7%
80.2%
81.7%
82.0%
80.0%
Net Fixed Assets
14.1%
15.7%
12.0%
13.8%
11.0%
Other Assets
5.2%
4.1%
6.3%
4.2%
9.0%
Total Assets
100%
100%
100%
100%
100%
Liabiities And Owners’ Equity
Current Liabilities
5.8%
5.3%
5.9%
5.2%
5.3%
Accounts Payable
13.7%
15.2%
15.4%
15.1%
14.7%
5.9%
6.6%
6.1%
6.3%
6.1%
25.4%
27.1%
27.4%
26.6%
26.1%
8.7%
8.9%
9.2%
9.5%
9.6%
16.1%
17.2%
17.4%
16.8%
16.9%
24.8%
26.1%
26.6%
26.3%
26.5%
Total Liabilities
50.2%
53.2%
54.0%
52.9%
52.6%
49.8%
46.8%
46.0%
47.1%
47.4%
100%
100%
100%
100%
100%
27
Pharmacy
Location
Rural versus Metropolitan Locations
Pharmacies defined their market type based upon the
population of their region. The categories were:
Population Less Than 20,000
Population From 20,000 to 50,000
Population More Than 50,000
Over fifty 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 22, 23, and 24.
The common-sized income statement shows that the
pharmacies in areas with less than 20,000 people
28
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.
The sales per employee, an indication of productivity, was
the highest in the pharmacies located in areas of more
than 50,000 people. Pharmacies in areas with more than
50,000 people were able to have higher gross margins and
lower payroll expenses, resulting in higher net profits
before taxes. Median sales for pharmacies were between
$3.3 and $3.4 million, regardless of the population size.
Yet, the median net operating income percentage was
lowest in the rural areas, and thus these pharmacies had
the lowest net operating income dollars before tax.
TABLE 22: 2012 COMMON-SIZED (AVERAGE) INCOME STATEMENT PERCENTAGE OF TOTAL SALES—METROPOLITAN VS. RURAL
Population of 20,000 to 50,000
Sales
Prescription Sales
91.2%
91.6%
89.2%
All Other Sales
8.8%
8.4%
10.8%
Total Sales
100%
100%
100%
Cost Of Goods Sold
Prescriptions Costs
71.2%
72.6%
70.2%
All Other Costs
5.8%
5.3%
5.9%
77.0%
77.9%
76.1%
Gross Profit
23.0%
22.1%
23.9%
Payroll Expenses
Salaries, Wages
11.7%
11.4%
11.3%
Payroll Taxes, Workers’ Comp, Employee Benefits
2.4%
2.2%
2.2%
14.1%
13.6%
13.5%
Advertising
0.4%
0.4%
0.5%
Insurance
0.3%
0.3%
0.3%
0.6%
0.6%
0.5%
0.3%
0.3%
0.4%
Rent
1.4%
1.4%
1.3%
0.4%
0.4%
0.4%
3.1%
2.9%
3.1%
6.5%
6.3%
6.5%
Total Expenses
20.6%
19.9%
20.0%
2.4%
2.2%
3.9%
29
TABLE 23: 2012 MEDIAN FINANCIAL BENCHMARKS, BY POPULATION DENSITY
2.4%
2.8%
3.2%
$81,408
$93,719
$108,482
Productivity Ratios
Sales Per Employee
$482,056
$481,914
$499,572
$49,914
$49,865
$48,701
$2,982
$3,017
$3,062
All Other Sales Per Square Foot
$109
$126
$136
$903
$1,035
$1,147
Median Sales
$3,392,000
$3,347,107
$3,390,063
Sales to Assets
4.65
4.86
5.17
19.6%
20.3%
20.2%
Debt to Worth
0.42
0.39
0.41
Cash Flow Ratios
Current Ratio
3.58
4.06
4.14
Quick Ratio
1.61
1.65
1.67
10.9
11.2
11.1
33 Days
33 Days
33 Days
11.8
11.7
12.1
Prescription Inventory Turnover (Days)
31 Days
31 Days
30 Days
22.7
23.6
23.9
16 Days
15 Days
15 Days
24.2
25.9
26.1
15 Days
14 Days
14 Days
30
TABLE 24: 2012 COMMON-SIZED (AVERAGE) BALANCE SHEET, BY POPULATION DENSITY
Assets
Current Assets
Cash And Cash Equivalents
16.7%
15.8%
15.2%
Accounts Receivable
20.3%
21.1%
22.7%
Inventory
32.7%
32.3%
31.8%
11.4%
11.1%
11.8%
81.1%
80.3%
81.5%
Net Fixed Assets
13.5%
13.7%
13.6%
Other Assets
5.4%
6.0%
4.9%
Total Assets
100%
100%
100%
Liabilities and Owners’ Equity
Current Liabilities
5.4%
5.9%
5.5%
Accounts Payable
14.6%
15.0%
14.5%
6.3%
6.1%
6.2%
26.3%
27.0%
26.2%
8.9%
9.2%
9.6%
17.4%
16.2%
16.9%
26.3%
25.4%
26.5%
Total Liabilities
52.6%
52.4%
52.7%
47.4%
47.6%
47.3%
100%
100%
100%
31
Overview of Financial Statements
and Performance Measures
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.
Financial Statements
The information gathered in the survey is summarized
and presented in three basic statements:
■
Common-sized income statement—percent of
total sales
■
Median financial benchmarks
■ Common-sized balance sheet—percent of total assets
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.
What Is A Common-Sized Statement?
Median Financial Benchmarks
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.
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.
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
32
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 2013 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.
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:
■ Assets—what the business owns.
■
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/digest.
For purposes of this report, financial performance is
measured in these four critical areas:
■
Profitability—gross profits, net profits, and expense
control
■
Productivity—staff and facilities
■
Financial position—asset use and managing debt
■
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 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.
33
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