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Pharmacy Financial Statements: The Numbers that Count
Scotty W. Sykes, CPA, CGMA
Cash flow and profitability are the key metrics in analyzing a pharmacy’s performance. You can’t have sustainable cash flow without profitability. Before we get into a few specifics, you must first maintain and support a functioning accounting system that provides timely, accurate financial data you can use to manage your pharmacy business. This is a key issue because, in my experience, many pharmacies do not have the fundamentals in place and are left wondering what is taking place in their pharmacy. Once you have the basics down, you’ll be able to identify your weaknesses and position yourself to rival your peers. Strong fundamentals include an in-depth understanding of these metrics...
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1. Third-Party Receivables
Your receivable balance from third parties is likely your biggest unreconciled bank account. Adjudicating and hoping you get paid is what many pharmacies do each day, but in the age of DIR/GER fees and tighter reimbursements, this principle just doesn’t work. Third-party reconciliation has many benefits such as producing accurate revenues in your accounting system, identifying DIR/GER and other adjudication fees, explaining any payments below adjudication, and providing insight to how long payers are taking to reimburse. Technology opens the door for these systems to add value to your pharmacy. If you haven’t implemented a system using technology to manage your third-party receivables, now is the time to start.
2. Inventory Management
Inventory management has always been a key metric for pharmacies. Even if you think you have this area under control, take a step back and be objective. Better yet, hire an outside inventory specialist. Chances are, you’ll find inefficiencies of which you were not aware. Any excess or idle inventory on your shelf is essentially hundred-dollar bills that are not in your bank. Consider a 12-time inventory turn rate rock bottom, and strive to increase inventory turns from 18 to 22 times a year to add cash flow to your pharmacy. With medication sync and adherence, the use of various inventory management technologies, perpetual systems and next-day delivery from wholesalers, why shouldn’t a pharmacy be closer to 20 turns a year?
3. Gross Margin
Of utmost importance is your gross margin. How does your margin stack up to industry averages? If you are underperforming in margin, then you are limiting your profitability and cash flow. Improve your margins by maximizing your adjudications, implementing sync, improving your purchasing, enhancing inventory management, and/or adding diversified revenues such as clinical services or compounding. Adding a couple of percentage points to your gross margin can add value to your bottom line and cash flow fast.
Circling back to the fundamentals, these numbers are vital to your accounting system. Any cash flow or profitability analysis is void without a solid understanding and accounting of these metrics. These are the areas that will make or break your pharmacy.
Download Issue : Drug Topics August 2019