Avoidable Financial Mistakes: A Must Read for Community Pharmacy Owners
How strong is your community pharmacy’s financial picture?
If you’re planning to operate your independent pharmacy for many years to come, then you want the security and stability of knowing you have a strong financial foundation.
Alternatively, if you think you might want to sell your pharmacy in the next three to five years you want to do everything you can to maximize the value of your pharmacy to ensure that you get the best offer from a prospective buyer.
Either way, you want to be careful to avoid pitfalls that can hurt the value of your pharmacy and undermine your financial security. Here are four of the biggest mistakes to avoid when it comes to the financial management of your community pharmacy:
1. Don’t let payroll costs balloon out of control
The average community pharmacy runs on 20 percent gross profit margins.1 At many independent pharmacies, payroll expenses account for more than 13 percent of revenues.2 If a pharmacy is in that ballpark, that means they have just a 5 percent margin with which to pay all other operating costs — rent, insurance, utilities, supplies, etc. — not to mention compensation as an owner.
How can a pharmacy get a handle on payroll costs?
- Compare budgeted vs. actual labor costs. Overtime costs can add up quickly, due in part to unintentional (or even intentional) abuse by employees. If an employee regularly clocks in even 10 minutes early, or clocks out 10 minutes after their shift ends, those minutes rapidly add up. Make sure to schedule employees to avoid unplanned overtime expenses. Equally important is to make sure that the pharmacy has consulted with their HR advisor and developed a written policy on overtime.
- Make sure labor matches demand. It doesn’t make sense to pay employees if there isn’t enough work to keep them busy. Run some reports on hourly and daily filling volume to make sure the volume justifies the workers scheduled for various shifts.
- Give bonuses rather than raises. At some community pharmacies, the owners have established a precedent of giving technicians a standard raise (e.g. 3 percent salary increase) every year. As a result of this policy, over a period of time, long-term employees can end up earning far more than the industry average. Indeed, their salaries can be so high that they hurt the financial health of the pharmacy. When business is booming, this may not seem like a problem – after all, employers want to reward their employees. But when times change, and the profits are down, employees don’t give back those previous raises, and in reality they may come to expect an annual increase regardless of profitability. Pharmacies can avoid this problem by establishing an annual bonus program that’s linked to the success of the pharmacy rather than the expectation of an annual raise. That’s not to say a pharmacy should never give raises. If hoping to retain or reward a high-performing employee, by all means give that person a raise, but don’t create the expectation that all employees — good, bad or mediocre — will get a raise each year regardless of their individual performance or the pharmacy’s overall performance.
- Give employees a stake in the success of the pharmacy. If instituting a policy of giving bonuses, consider tying those bonuses to the pharmacy’s overall performance, or even to individual performance goals that contribute to the pharmacy’s success. This makes good sense for several reasons: First, it gives employees an incentive to do their very best work. They know that if the pharmacy does well financially, their bank accounts will also benefit. Second, when the employees’ own success is tied to the success of the pharmacy, this gives employees a sense of ownership, which can in turn increase loyalty and retention. Finally, this policy ensures a community pharmacy won’t have to worry about paying bonuses in a lean year when such an extra expense could be especially difficult to bear.
- Assess employees according to their productivity and performance. If a pharmacy has been handing out regular raises for years and has a high-earning, long-term employee who consistently does good work and exceeds expectations, try looking for ways to give that employee additional responsibilities to justify their high salary. But remember, a long tenure does not always predict superior job performance. If certain employees are simply not productive enough to justify their high pay scale, it may be time to reconsider the future of the employee. Before severing the relationship with an employee, be sure to consult with an HR advisor to make sure the pharmacy is compliant with all the relevant regulations.
2. Don’t leave money on the table
Too many community pharmacy owners take a lax approach to claims reconciliation. Nowadays, most independent pharmacies receive payment via direct deposit, but where there are physical checks, some worth tens of thousands of dollars, errors can occur — they have been mailed to the wrong address or misplaced among other mail. Since an individual check can contain reimbursement funds for multiple claims, a single missed check could potentially cost a pharmacy a huge amount of money.
Even with direct deposit, pharmacies still need to double-check their records to compare receipts against the amount billed in order to ensure proper payment. If a pharmacy has a service that handles reconciliation, don’t assume that the service will automatically chase down and rectify any underpayments. Under a basic level service agreement, it may be the pharmacy’s responsibility to chase down payments on claims that the service flags.
If this seems like too much work, there are concierge-level services that promise to handle more of the legwork on reconciliation. But when using such a service, a pharmacy will want to log into its account, see what funds are still outstanding and have a plan to follow up where necessary.
Finally, keep in mind that DIR fees have made the entire reconciliation process much more complex. DIR protocols vary from one payer to another, and a pharmacy may see DIR fees subtracted months after a claim has been submitted. That lag time makes it extremely difficult for any pharmacies still trying to do manual reconciliations. Instead, a pharmacy should consider how available reporting tools can help them maximize their reconciliation process and make sure they’re not missing any hard-earned revenue.
3. Invest in a modern record-keeping system
Poor record-keeping is a problem at many community pharmacies. Pharmacy owners need to produce P&L (profit and loss) statements for their business or have their accountant create one that they can review together.
If a pharmacy owner ever wants to sell their business, a history of careless record-keeping could come back to hurt them. Buyers generally aren’t willing to just take the owner’s word regarding the health or profitability of the business.
Sure, it’s possible to balance books with pen, paper, a calculator and a business checkbook, but that manual system is time-consuming, inefficient and leaves you at risk of making costly errors. Using current technology, vendors offer solutions that will automatically link data from a POS (point of sale) system to cloud-based accounting software.
Alternatively, a pharmacy can send data electronically to an accounting firm to handle record-keeping remotely. Either way, a pharmacy can receive payments via direct deposit and set up automatic bill payments. If uncomfortable implementing or managing such a system, delegate to a trusted, tech-savvy employee.
Additionally, a modern, computerized record-keeping system can provide transparency into a pharmacy’s operations — from monitoring and proactively responding to changes in payroll costs, to tracking the financial impact of new marketing initiatives. And modern technology makes it easy and convenient to print off reports and show prospective buyers data on pharmacy sales, revenue, growth or profitability.
4. Spruce up the physical appearance
Many community pharmacy owners enter through the back door and spend their whole day behind the counter. They never actually get to see what the pharmacy looks like from the customer’s point of view.
When one works in a pharmacy for years or decades, it becomes familiar and comfortable. When accustomed to seeing the same view every day, it’s easy to overlook opportunities for improvement. Owners should try to look at their pharmacy with fresh eyes, just as a new patient would when seeing it for the first time. Any flaws seen by an owner or patient aren’t going to be overlooked by prospective buyers either.
Work with professionals to update and transform a pharmacy’s appearance — or try a DIY approach with just a bit of elbow grease. The good news is that it’s relatively easy and cost-effective to update the physical appeal of a pharmacy, especially if an owner undertakes renovations incrementally over a few years. A fresh coat of paint doesn’t cost much. Taking down signs or other items that block glass and windows doesn’t cost a dime, but it can make a big difference in terms of making a pharmacy seem brighter and more welcoming.
And small, seemingly unimportant changes, can make a big difference. Check to make sure that all light bulbs are functional. If any are burned out, consider replacing with super-efficient LED bulbs that can reduce the electricity bill and rarely need replacing. If there are planters outside the store, they can help or hurt a pharmacy’s curb appeal. Keep planters fresh with healthy or new shrubs and/or flowers. Consider hiring a professional who can swap out fresh annuals on a regular basis. Or get rid of the planters entirely if it’s too much work or expense to keep them maintained.
At the front of the store, work with a merchandiser if necessary, but make sure the shelves are fully stocked in a clean and organized way. Having bare, dusty shelves is not appealing to either customers or prospective buyers. And if a pharmacy doesn’t need that shelf space, it’s better to simply clear out some of the unused shelving and create a larger, more comfortable waiting area.
When examining a pharmacy with an eye toward improving its visual appeal, take time to examine the workflow too. If employees are always bumping into each other or walking long distances to complete their tasks, improve efficiency and productivity by moving the placement of some of their workstations. Whether planning to operate for some time, or thinking about selling, taking care of the financial aspects of a community pharmacy now will only benefit the business in the long run.
1. Fein. A. (17 November, 2015). Independent Pharmacy Economics: Profits Steady but Sales Down. Retrieved 12 July, 2017 from http://www.drugchannels.net/2015/11/independent-pharmacy-economics-profits.html
2. PBA Health. (11 November, 2015). What Does An Average Independent Community Pharmacy Look Like? Retrieved 12 July, 2017 from https://www.pbahealth.com/what-does-an-average-independent-community-pharmacy-look-like/