A budget will help you to monitor the financial health of your practice – but that’s just the beginning. Stephen Allan, Credit Executive at Medfin Finance, explains how a budget can also help you to run a more productive and profitable practice.
12 March 2015
If there is one constant in the health sector, it is that change will always be with us. Whether that change is driven by demographics, technology or regulation, every part of the health sector is continually evolving.
This is particularly true for Australia’s 5,500 community pharmacies across the country.
Twenty years ago, the idea that your local pharmacy could assist with services like blood pressure tests, diabetes risk assessments and smoking cessation programs would have been quite foreign. But today, thousands of community pharmacies across the country are providing these services to Australians.
While this diversification by community pharmacies has been an important step to extend the reach of preventative and primary health care, it has also been an important business development for pharmacy operators.
Over the last decade, pharmacies have been in search of alternative revenue sources as dispensing income contracts – and this trend is unlikely to change any time soon with price reductions under the Government’s Simplified Price Disclosure issued in October 2014 leading to a decrease in dispensing revenue by 1.9 per cent in 2014-15.
The future of dispensing income and indeed the overall competitive landscape for community pharmacy will be influenced by the current Competition Policy Review, PBS Price Disclosure reforms and the 6th Pharmacy Agreement.
Despite these challenges, the future is still bright and Australia’s 28,000 registered pharmacists have much to be optimistic about.
Not only are there additional opportunities for pharmacies to extend further into primary and preventative health, our research demonstrates that pharmacies themselves can adopt better business practices to improve revenue, returns and overall business productivity.
As the nation’s number one business bank with the largest network of dedicated health bankers in Australia, we are uniquely placed to provide valuable business insights to community pharmacies.
Three key metrics
While there are always lots of options to improve the productivity of pharmacies, exclusive NAB research has identified three important metrics for community pharmacies to keep an eye on.
First, improving cash flow by measuring stock turnover is a relatively simple, but very effective tool to ensure that adequate stock controls are in place to reduce inventory costs and increase stock turns. Within the pharmacy sector, NAB data shows that average stock turnover nationally moved from 5.21 in 2010 to 7.66 in 2014. This means, of course, that pharmacies are improving their stock turnover – ensuring stock sits on shelves for a shorter amount of time, resulting in better cash flow. But, with top performers having stock turnover rates as high as 8.5, there is always room to improve.
Dispensary to sales ratio
Second, keeping an eye on the dispensary to sales ratio can also help pharmacies to understand where key sales are being generated. For example, we have seen average dispensary to sales reduce in pharmacies from 68.8 per cent in 2010 to 66.2 per cent in 2014. As non-dispensary income grows, it will be important that community pharmacies understand their customers and the product mix they want to see on pharmacy shelves. The right product mix for the right target market keeps businesses focussed and customers happy.
Wage costs-to-sales ratio
Finally, understanding how much a pharmacy is spending on its people is critical. In Australia’s pharmacies, wage costs-to-sales ratio has increased from 11.9 per cent in 2010 to 14.3 per cent in 2014. However, it’s important that spending on people is not just seen as a ‘cost’. Some of Australia’s most successful pharmacies have focussed on attracting a talented work force that puts the customer first. This can mean a greater up-front cost, but this investment will pay dividends over time.
There is, of course, a lot more to running a pharmacy than numbers. But, a pharmacy’s numbers can give some quick ‘vitals’ to understand how the pharmacy is operating compared to peers, and help steer the pharmacist towards business improvements opportunities.