Managing Labor Costs in an Independent Pharmacy
Next to cost of goods, labor costs are usually the second largest expense for an independent pharmacy. Labor costs should be no more than 10.5% of a pharmacy’s revenue and can cut into margins quite significantly if not measured and controlled. In this video, Scotty Sykes talks about what percentage of your gross revenue should go to labor costs and what to consider if you need to cut costs. He also provides some insight on technology that can help reduce labor costs and increase script filling accuracy.
Find out in this video how your pharmacy inventory management also impacts your gross margins.
If you prefer to read this content, the video transcript is below.
Well when a pharmacy is over viewing their financial performance and they’re looking at the net income of the pharmacy, it’s not where it should be in that 3 to 5 percent range maybe. Of course outside of cost of goods, which is the biggest expense you have. The second thing is going to be your payroll, and what we typically see for payroll is a percent of revenue. That’s how we track that statistic, is we like to see it in that 10 and a half percent range, 10 and a half percent of total revenue, and that’s about the averages we see. Of course many pharmacies are in single digits as a percent of revenue when it comes to payroll, and obviously any 1 percentage point of total revenue is going to be a lot of money. If you’re talking about a 3 million, 4 million, 5 million dollar store. And that’s going to go straight to the bottom line, and straight … it’s positive cash flow for the pharmacy. So managing your payroll is going to be very important, it should be one of the first places you take a look at when you’re analyzing, and one of the first things you need to do is first of all be able to measure that, make sure your accounting is where it should be, that you have your payroll reconciled the way it should be, and then you can analyze where you stand as payroll as a percent of revenue. Once you have that idea, and say you may be 13 percent of total revenues and a standard community retail pharmacy. Well that’s just too heavy with payroll, and you’re going to find yourself hurting with cash flow, and making that wholesale or payment each month. When you find yourself in that situation one of the first things I always tell pharmacists is look at your hours that you are open, and a lot of times you will see where these pharmacies are open on Saturdays and Sundays, or one or the other, and maybe they’re open all day on Saturdays, and Sundays. Is that necessary? Is the pharmacy bringing in revenue to support that heavy cost of payroll? And a lot of times the answer is no if you look at the weekend hours of a pharmacy there’s peak hours between maybe 9 A.M. on a Saturday to 2 P.M. on Saturday, or maybe 12 P.M. on a Sunday to 3 P.M on a Sunday. So you need to be pulling reports, and the script system to see revenue’s you’re bringing in on those weekend hours, and whether you’re supporting the payroll costs and the pharmacy and you take that. If you trim your hours a few hours on a weekend, times 52 weekends, you’re going to see that payroll cost come down and you’re going to start to bring more cashflow in to the bottom line of your pharmacy and your bank account. But that’s certainly one of the things you want to take a look at is your weekend hours. The second thing is of course technology. How can technology streamline make your staff more efficient and ultimately maybe trim costs as part of that? And you know the technology today is getting more, and more advanced there’s more, and more uses for that technology and it’s becoming more widespread. So overview those technology needs, use technology in your pharmacy, whether it’s script filling robots, pill counters, whatever it may be to speed up, to make your staff more efficient and hopefully over time you can begin to trim payroll in that way. One of the last things I’ll mention is putting your sweat equity into the business, you know you got to work hard. You can’t … Some pharmacies, pharmacists will take a kind of a back seat to fill in scripts and taking care of their customers. Be out front, manage that pharmacy and be in the roll of earning that payroll that you are taking to help ultimately trim your overall costs so you’re not paying another pharmacist to fill in maybe the roll that you would be doing. So those are the key take aways with managing your payroll costs.