The Changing Pharmacy Dynamics: Unveiling New Financial Trends for 2024
From the unknown intricacies of DIR fee changes at the point of sale to the retrospective implications of the 2023 clawback, many changes have impacted pharmacy accounting in 2024.
In this article, we transform uncertainty into clarity by sharing real-time financial data and trends that are now shaping the pharmacy industry.
We’ll discuss updated key performance indicators along with a few strategies to help you set the course towards growth, profitability, and better patient outcomes.
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Updated Key Performance Indicators
We’ve seen many changes this year in the independent pharmacy accounting space. Most notably with DIR fees and the disruption of payments with third-party receivables due to the change-healthcare cyber-attack.
In addition to DIR changes and change healthcare, we’ve also noticed changes in financial key performance indicators and benchmarks for independent pharmacies.
Here are some of the main KPIs your pharmacy needs to pay attention to:
Current Ratio
One of the main key performance indicators that has changed is current ratio.
In the past, a healthy pharmacy could have a current ratio of 2/1 (this means that they have $2 of cash, receivables, and inventory for every $1 of current debt). Today, an independent pharmacy should really be aiming for a current ratio greater than 2.5/1 (we set a goal for all of our clients to achieve a current ratio of 3/1).
If you’re below this range, it’s crucial that you figure out why. If you need help figuring out what your current ratio is or if you’re below that 2.5/1 range and you want to understand why, schedule an Rx Assessment with our team and we can help you understand your numbers.
Inventory Turns
Another key performance indicator that has changed is inventory turns (this measures operational and supply chain efficiency).
We recommend an independent pharmacy maintains an average inventory turn greater than 20.
The pharmacies that we see with average inventory turns greater than 20 are managing their inventory better and in turn have healthier bottom lines.
Not hitting inventory turns greater than 20 or not sure where your inventory stands? Schedule an Rx Assessment with us and we can help give you an idea as to where your inventory stands and more!
Average Gross Margins
In addition to the current ratio and inventory turns, you also need to be looking at your average gross margins.
Your average gross margins will tell you how much revenue your scripts and clinical services generate per dollar after subtracting your cost of goods sold (COGS).
An independent pharmacy in 2024 should be aiming to achieve a gross margin greater than 20%.
Not sure what your gross margins are or looking to improve them? Schedule an Rx Assessment with us for strategies on how to improve the gross margins in your pharmacy.
Payroll as a % of Revenue
In the past, a healthy pharmacy could have a payroll percentage around 10%. This includes gross wages (including your owners).
In 2024, a retail pharmacy needs to have a payroll percentage less than 10%.
What You Can Do About It
Now that we have covered revenue and gross margins trends and some changes to KPIs, let’s share some strategies your pharmacy can apply moving forward to help you achieve these new industry benchmarks.
Fundamental Accounting
The first strategy towards achieving new industry benchmarks is implementing fundamental accounting.
You may have heard the saying “accounting is the foundation of all businesses” and if you’re familiar with us at Sykes & Company, P.A., then you know how big we are on fundamental accounting and how it can impact your pharmacy
However, we still see a lot of pharmacies today that don’t have a good fundamental accounting system that they can rely on.
Here are the top 3 benefits that a fundamental accounting system offers and why you should implement one.
Provides Real-time Information
The first benefit to a fundamental accounting system is that it provides real-time information.
When you have a fundamental accounting system in your pharmacy, you’re able to get real-time information into the financial health of your pharmacy on a daily, weekly and monthly basis.
Allows a Pharmacy Owner to be Proactive
The second benefit to a fundamental accounting system is that it allows a pharmacy owner to be proactive.
If you’re tax planning, it’s important that you are proactive and there are no surprises. A proactive pharmacy owner is able to focus on working on the pharmacy and providing better patient outcomes.
Delivers Insights to Trends, Weaknesses, and Strengths
Knowing the trends in your pharmacy and what your strengths and weaknesses are gives you the ability to plan better. It also allows you to compare your pharmacy(s) to your peer’s pharmacy(s) which can give you insights into areas of opportunities that you may be missing.
Diversify Your Revenue
The second strategy your pharmacy can implement to achieve new industry benchmarks is diversifying your revenue sources.
The National Association of Community Pharmacists has a list of opportunities that your pharmacy can expand into based on your area.
In addition to what the National Association of Community Pharmacists mentions (NCPA), there are some areas of opportunities that right now are bigger than others such as long-term care at home, immunizations, medical billing, nurse practitioner placements, and compounding
In a separate blog, we actually broke down each of these revenue streams in more detail.
Tax Planning
The third strategy towards improving your pharmacy accounting we recommend is to look at tax planning strategies.
Depending on your pharmacy and where you’re at in your ownership career, there are several tax strategies.
3 of the most common strategies we put in place for independent pharmacies is accrual to cash, retirement planning, and depreciation (section 179).
Conclusion
Independent pharmacy has seen a lot of changes in 2024.
With the DIR clawbacks, changes to KPIs and opportunities for diversified revenue, understanding your numbers is incredibly important.
Not sure where your pharmacy stand financially or if you’re hitting the right numbers? Schedule an Rx Assessment with our team or contact us today!
