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The Profit Vault October 2023
We’re always told to trust our gut feeling, but when it comes to running your pharmacy, you will need a little more than that to know where you stand. This month, it’s time I talk about KPIs and how important they are for knowing where your pharmacy is at as well as the next urgent steps you need to take. Relying on a gut feeling to determine your pharmacy’s performance is a guessing game. Numbers, however, offer transparency and clarity. Understanding your true profitability and performance can be daunting. However, it is mandatory to propel your pharmacy to the next level. There are three critical KPIs you need to be tracking: payroll ratio, inventory turns, and expense ratio. Measuring, tracking, and improving these KPIs is your roadmap to success. In this month’s newsletter, we’ll review each of these KPIs and how to enhance them. When you focus on improving these three critical KPIs, you can feel confident that you are doing the most important work you can to help improve your pharmacy’s profitability. With the help of these three indicators, you can easily see what’s out of whack and what you need to do. Build a Strong Foundation There are hundreds of KPIs you could manage, but before you get lost due to “shiny object syndrome,” you need to focus on the basics. Shiny object syndrome happens to even the most efficient owners. You want to work on the fun, more challenging KPIs and opportunities. While they may be sexy, working on those before these three basic KPIs is like painting a condemned house without a floor. Without a solid foundation, it can still fall apart (fancy new paint or not) . Go From Guessing Game to Concrete Data Use KPIs as Your Pharmacy’s Roadmap to Profitability
That’s why we created a detailed strategy to help you crack down on these main KPIs. DiversifyRx members get access to these roadmaps to success and step-by-step guidance on ensuring your pharmacy is profitable. So, how do you measure these top three KPIs? Follow the Stoplight Method Green, yellow, and red are the three markers you need to remember when evaluating your KPIs. If you can get all three of these KPIs in the green, you know you have a profitable pharmacy. When you start digging into these KPIs, I highly recommend that you follow them in this exact order. First, your payroll ratio, as this is one you have complete control over and can make immediate changes to. This KPI only requires some light lifting to see a significant impact. Second, you should evaluate your inventory turns. While this one takes more energy and time, it can have an even larger impact than your payroll ratio.
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Your payroll is the first hiding spot to check when searching for weak spots in your KPIs. Not only is it the easiest to change because it’s in your complete control, but it’s also relatively simple to calculate. We fully understand that your employees are the heart of your pharmacy, and supporting them the best you can is always a priority. However, a bloated payroll will damage your pharmacy and hurt everyone in the long run. We know that pharmacy owners are usually the kindest, most giving people out there. You joined this field to help people! You want to hire multiple people and offer significant yearly bonuses. But letting that generosity inflate your payroll can creep up on you over time, and suddenly you’ll see that your revenue and payroll ratio is entirely out of control. Calculate Your Payroll Ratio You need to review these numbers consistently to ensure your payroll ratio stays in the green zone. We have the key numbers you must know when evaluating your payroll ratio. Add up all your payroll costs, including salaries, bonuses, taxes, benefits, and insurance for all revenue-generating employees. Then, divide your total payroll costs by your total revenue for the same period. The number you get is your payroll ratio. Empower Your Team and Your Bottom Line Strategies for Lowering Your Pharmacy’s Payroll Ratio
the performance of your pharmacy. Once you calculate your payroll ratio, you can determine how much payroll you need to cut or how much your revenue needs to increase by. It’s a simple math problem! If you want to keep every team member, you must find a way to lower your payroll costs or increase your total revenue. Clearly, increasing your revenue is the preferred option, and we have ways to get this process started. But to see faster changes and lower your payroll ratio, making cuts may need to happen first. You can do this by cutting back hours, adjusting wages, or optimizing your team’s schedules. Reducing your team’s hours by one to three hours a week per employee can make a huge difference in your payroll ratio without significantly impacting any single employee.. Practice complete transparency and share your new goals to balance revenue and payroll with your team. If you need to reduce wages, start offering performance-based bonuses that allow team members to make up the difference. You can also create a team goal to increase revenue to get payroll back to where everyone wants it to be. Not only does this increase job security, but it keeps everyone accountable. We understand that you likely don’t want to fire anyone, and you don’t have to. Essentials and Unlimited members have complete access to our payroll ratio KPI course, which will allow you to calculate how to keep your team and balance your payroll. We’ll walk you through the whole process and crunch all the numbers together. You can access this course through your online dashboard or scan the QR code!
Total Payroll Costs ÷ Total Revenue for same period = Payroll Ratio
Now, multiply your payroll ratio to get a percentage. Here’s the benchmark:
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Red > 14%
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Yellow = 13-14%
•
Green <13%
You want less than 13% to be in the green, but if you want a high- performing pharmacy, you need that ratio to be less than 11%. How Can You Lower Your Ratio? We are all for supporting employees and giving them the best possible wages and benefits. However, this must be based on
Scan the QR code to check out our Payroll Ratio KPI course!
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Master Inventory Management and Boost Your KPI Poor Inventory Management Can Drain Your Wallet
inventory is the same as death by a thousand cuts! Tiny mistakes and over-ordering different products can make your KPI far lower than it should be. As a result, your inventory can create a black hole that’s stealing all your cash. Let’s break it down step-by-step. To calculate your inventory turns, you must divide your annual cost of goods sold (COGS) by your current inventory value. If you don’t have your annual COGS number, you can instead take a recent month’s number and multiply it by 12 to get a reasonable approximation. Your equation should look like this:
We all want an inventory stocked up with every possible item on the market, but that’s impossible, especially if your cash flow is already lacking. If your wallet only has dust bunnies inside, an over-stocked inventory may be to blame. Fixing your inventory turns KPI requires the most heavy lifting out of our three critical KPIs, but it can make a world of difference. It’s no wonder that our inventory course is our most in-depth one!
Annualized Cost of Goods Sold (or last month’s COGS x 12) ÷ Current Inventory Value = Inventory Turns
Properly managing your inventory isn’t hard, but there are numerous elements you need to consider. A poorly managed
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TAKE CONTROL OF YOUR FINANCES How to Optimize Costs and Maximize Pharmacy Savings
A dollar saved is a dollar earned, and nothing more true can be said about running a pharmacy. You have to fork over endless expenses just to keep your pharmacy up and running, but are these expenses the lowest they can be? While you might think costs are mostly fixed, you need to start reviewing your spending and pinpoint the places that can be tightened. This is where your expense ratio KPI comes into play. Your pharmacy’s expense ratio is how much you spend compared to how much revenue you make. To find your expense ratio percentage, divide your operating expenses by your total revenue, then multiply this number by 100 to get your percentage. Total Operating Expenses ÷ Total Revenue x 100 = Operating Expense Ratio Operating expenses can range from rent and utilities to payroll and carpet cleaning. If you can decrease your total operating expenses, you can lower your expense ratio and boost your entire bottom line. For struggling pharmacies, cutting costs should be one of the first moves you make. Expenses can get bloated over time without you realizing it, especially if you don’t regularly review them.
Just like how we spend money in our personal lives, it can become incredibly easy to get used to spending too much money. Many of us are even afraid to look at our account balance, and this can apply to pharmacy expenses, too! When you don’t look at your financials, costs can snowball quicker than you might think.. Find the weak spots and start cutting! To get started, simply go through and question everything! Ask yourself: • Do I need this? • Can I get this cheaper? • Can I negotiate a lower price? • What can I eliminate? Go through your expenses and cut the fat. You can save yourself hundreds, if not thousands, of dollars just by trimming the excess from your expenses on a regular basis. We recommend you start with an initial deep dive into all your expenses. Then twice a year check in on them and ensure they haven’t gotten out of line. Not sure where to start?That’s why we offer a course for our Essentials and Unlimited members. We’ll point you in the right direction and provide examples of everything you can cut in your pharmacy’s overall expenses. Scan the QR code to start the course today. We want to see your pharmacy grow, and the key to doing so is getting your foundation KPIs in check!
Scan the QR code to learn how to take control of your expenses!
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Control Your Inventory Control Your Cash Flow Revolutionize the way you manage your inventory and boost your cash flow! In today's competitive landscape, efficient inventory control is the key to profitability and growth. With our course, you can gain the upper hand in this critical aspect of your business.
Course Highlights:
Inventory Best Practices Improve Cash Flow Know Exactly What To Do Data-Driven Decisions
Access the course inside Pharmacy Badass University - Login > Searchbox > Inventory
Partner Spotlight:
Control your pharmacy inventory, instead of it controlling you
Datarithm's SAAS solution helps you further streamline your inventory management processes. We highly recommend it as a valuable addition to your pharmacy's toolkit. Lisa uses it in her pharmacies.
Supercharge your inventory management, explore what Datarithm has to offer.
https://www.datarithm.co/
www.diversifyrx.com info@diversifyrx.com
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READY FOR MORE PHARMACY BOOSTING KPIS? Consider These KPIs After Your Critical 3 Are Green
Since we entered the digital age, the number of KPIs businesses can track has exploded. You could spend all day tracking and reporting on hundreds of KPIs. Not all KPIs are created equal. Let’s look at some additional KPIs you should spend your time on, once you have
your Payroll Ratio, Inventory Turns, and Expense Ratio all in the green zone.
Stay focused on what matters most, and add these metrics for tracking your pharmacy’s performance.
PBM Revenue Ratio Goal: Less than 85%
To figure out this ratio, you will take all your revenues from PBMs (including patient copays) and divide that number by your total pharmacy revenues from all areas. Once you multiply by 100, you will have your percentage. Most pharmacies are in the high 90s. That is just the nature of the beast. However, for pharmacies that have focused on diversifying their revenue streams, such as unique OTC lines or clinical-based revenue, they can see this number drop to the 50s and 60s. If you want to break away from the tyranny of PBMs, this is your number to track.
Every pharmacy has a normal attrition of patients. You need to add about 1% of your total patients just to maintain your pharmacy. If you are looking to grow, then set your goals higher.
Tip: Use a referral program to add new patients..
Number of Days of Cash on Hand Goal: Greater than 15
Your bookkeeper or accountant should be giving you this number monthly. It is a multi-step calculation. First, you need to calculate your average daily expense rate. Take your expenses for the month and divide by the number of days in the month (or you can use a standard 30 days). The second step is to take your cash balance (the amount of readily available cash in your bank) and divide it by your daily expense rate. The resulting number will tell you how many days of expenses you can pay with your current amount of cash. This number helps you understand how healthy your cash flow is.
Tip: Here are some ideas for alternative revenue streams: RPM , Worker’s Compensation , or Weight Loss Coaching .
Monthly New Patients Goal: Varies; often, higher is better.
To monitor this number, you will need to run a report from your pharmacy management software (PMS). Many have this report pre-built in. If you are not sure, just send a message to your support team, and they should be able to tell you the steps. The goal for new patients isn’t always higher is better. You can grow yourself out of business because of the high amount of accounts receivable (AR) in pharmacy. Adding too many new patients can lead to a severe cash flow crunch. However, if you aren’t growing, you are shrinking.
Tip: Go through our 5-Day Cash Flow Challenge to improve your cash flow.
We are here to help! We can work directly with you, your team, or even your accountant to help craft the perfect menu of KPIs to track for your pharmacy and goals. Reach out to the DiversifyRx team at anytime.
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white data, you can better focus on exactly what steps you need to take and when to take them.
Our membership roadmap is also an excellent focus tool to keep you on track. Working on your KPIs isn’t just a one- and-done action. It’s a routine you should regularly practice. Especially when you feel like your pharmacy is struggling but can’t pinpoint why, returning to your KPIs is the best way to move forward. Data doesn’t lie!
If you need help calculating your KPIs or how to improve them, all Essentials and Unlimited members can schedule
a call with our coaches from your membership dashboard. We’ll give you the one-on-one coaching you need to master these KPIs, get in the green, and make your profits soar!
Last is your expense ratio. You can’t always make immediate changes to your expenses. Working on this final KPI doesn’t take a lot of effort but it requires consistency. Stay Focused and See Rewards The biggest challenge I see pharmacy owners face is a lack of focus. I understand there are so many obstacles you want to overcome, but trying to do everything at once just leads to mediocre results and a poor foundation. With KPI’s black-and-
HAVE A LAUGH
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5 KPIs to Hand Over to Your Team Delegate KPIs to Technicians for Increased Productivity
Let Your Team Own It! With increased responsibilities, your team should also expect rewards for their hard work. When introducing their new duties, you can also offer performance bonuses! Once your technician or team reaches specific KPI goals you create for them, they’ll receive a bonus. This incentive encourages them to work harder and reminds them that you respect their time and efforts. The amount of this bonus is up to you and how much your pharmacy can afford! Providing your team with more control allows them to feel a sense of pride and accomplishment in what they do, and handing over KPI responsibilities can have a lasting positive impact on your team. When faced with neverending menial tasks or no opportunities for growth, your team can quickly feel unfulfilled. Let
With a seemingly endless list of things to do, focusing on every KPI may not be an option. That’s why delegating these metrics to your technicians can be an incredible opportunity to accomplish more and uplift your team. Fixing KPIs doesn’t have to be a task just for owners! Of course, having technicians track every KPI doesn’t make sense. They have no control over payroll or minimizing overall expenses the same way you do. To successfully delegate KPIs to your technicians, you must assign ones appropriate for their job duties and expertise. What parts of the pharmacy do they control and interact with on a daily basis? Go through your KPIs and pinpoint which ones suit your team and their responsibilities best. 5 KPIs for Your Technicians Luckily, we already did most of the mental heavy lifting for you! DiversifyRx has a helpful resource with five different KPIs your technicians can start improving ASAP. With their skill set and knowledge, the best-suited KPIs for technicians are:
them own these KPIs and become stronger because of them!
• Inventory Turns: Record and optimize inventory value and annual COGS.
We have a complete worksheet filled with KPIs for
• OTC Dollars: Catalog and increase OTC sales every month.
• Sync Percentage: Calculate and manage the number of sync scripts every month compared to total scripts.
technicians that can also help you calculate your monthly goals. Scan the QR code to download this
• Gross Margin Per Script: Calculate and optimize margin dollars for every month compared to the total number of scripts for every month.
worksheet and get your team started!
• Monthly New Patients: Create a goal and work toward increasing your new patient count!
Scan the QR code to download our worksheet and start calculating your KPI goals!
While this isn’t a complete list of potential KPIs to assign to your team, it’s a great starting point. You don’t want to overwhelm your technicians with a dozen KPIs at once. You know your team and what they can handle, so assign KPIs accordingly!
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1 How KPIs Can Transform Your Pharmacy’s Performance 2 Calculate and Manage Your Pharmacy’s Payroll Ratio 3 The Step-by-Step Guide to Improving Your Inventory Turns 4 Simple Steps to Reduce Expenses and Increase Profitability 5 Three Pharmacy Boosting KPIs 7 Empower Technicians With KPI Responsibilities INSIDE THIS ISSUE
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To be in the green, according to our stoplight method, your inventory turns needs to be at a minimum of 20. While green is at 20, you’re better off aiming for 24 and higher! Don’t get scared by these numbers. You have complete control over your inventory and we have the exact steps you need to follow. In fact, you can drastically improve your inventory in just 30 days. While reaching your final goal can take several months, big changes can happen in a short time when you follow our tips. For weirdos like me, fixing inventory is fun. If you’re normal and think it is tedious, just know this is some of the most important foundation work you can do for your pharmacy. The fun stuff will come even faster when you have a well controlled inventory. Here are some quick ways to clean up your inventory and get your KPI on the rise:
• Make sure your daily order is below your daily COGS.
• Sell unreturnable stock to other local pharmacies.
Performing these tasks regularly will increase your inventory turns before you know it! Of course, this may seem daunting to handle on your own. So, don’t! Assign your technician or a team of technicians to work on inventory consistently. As the owner, you already have plenty on your plate. Move these tasks down the line, and let your team own it and take pride in inventory! After several months of consistent inventory management, you should see a significant improvement in your inventory turns. Letting your inventory run amok and overstocking can lead to critical cash flow issues for your pharmacy, and it’s vital that this KPI is on your immediate to-do list. Go through our members- only course to gain all the information and resources you need to increase your KPI. Scan the QR code to get started! Our team is also here if you need additional guidance and coaching.
• Do regular inventory cleanups to return eligible items to their wholesalers.
Scan the QR code to check out our course on how you can increase your KPI!
• Return expired products to a reverse distributor to get a credit.
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