116th annual convention - ncpa · 116th annual convention date: tuesday, october 21, 2014 ......

116th Annual Convention

Date: Tuesday, October 21, 2014 Time: 8:30 am – 10:00 am Location: Austin Convention Center, Room 18CD, Level 4 Title: NCPA Digest, Sponsored by Cardinal Health: A Guide to Improved Pharmacy

Practice Sponsored by Cardinal Health

ACPE # 207-000-14-227-L04-P 0.15 CEUs ACPE # 207-000-14-227-L04-T Activity Type: Application-based Speaker: Donna West-Strum, Chair and Associate Professor of Pharmacy Administration,

Research Associate Professor, Research Institute of Pharmaceutical Sciences, School of Pharmacy, The University of Mississippi Richard Jackson, PhD, President, Community Pharmacy Consulting

Pharmacist and Pharmacy Technician Learning Objectives: Upon completion of this activity, participants will be able to: 1. Discuss financial performance trends in independent community pharmacy in 2013. 2. Outline how to utilize pharmacy average data to benchmark individual performance indicators from a

community pharmacy. 3. Summarize key data to collect to assess pharmacy niche performance. Disclosures: Donna West-Strum is receiving an honorarium for this program. The conflict of interest was resolved by peer review of the slide content. Richard Jackson is the President of Community Pharmacy Consulting and is receiving an honorarium for this program. The conflict of interest was resolved by peer review of the slide content. NCPA’s education staff declares no conflicts of interest or financial interest in any product or service mentioned in this program, including grants, employment, gifts, stock holdings, and honoraria.

NCPA is accredited by the Accreditation Council for Pharmacy Education as a provider of continuing pharmacy education. This program is accredited by NCPA for 0.15 CEUs (1.5 contact hours) of continuing education credit.

NCPA Disclosure Statement The National Community Pharmacists Association (NCPA) Office of Continuing Education makes every effort to develop continuing education activities that are scientifically based, accurate, current, and objectively presented. In accordance with the Accreditation Council for Pharmacy Education Standards for Commercial Support NCPA has implemented a mechanism requiring everyone in a position to control the content of an educational activity to disclose any relevant financial relationships with any proprietary entities producing health care goods or services and mange/resolve any conflicts of interest prior to the activity. Individuals must disclose to participants the existence or non-existence of financial relationships. NCPA does not view the existence of interests or relationships with commercial entities as implying bias or decreasing the value of a presentation. It is up to the participants to determine whether the interest or relationships influence the presenter with regard to exposition or conclusions. If at any time during this activity you feel that there has been commercial or promotional bias, please inform us by reflecting the information on the session evaluation form.

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NCPA Digest, Sponsored by Cardinal Health:

A Guide to Improved Pharmacy Practice

Donna West Strum, RPh, PhDChair and Professor

Department of Pharmacy AdministrationUniversity of Mississippi

DisclosureDisclosure

Donna West Strum is receiving an honorarium for this program. The conflict of interest was resolved by peer review of the slide content.

Learning ObjectivesLearning Objectives

1. Discuss financial performance trends in independent community pharmacy in 2013.

2. Outline how to utilize pharmacy average data to benchmark individual performance indicators from a community pharmacy.

3. Identify key data to collect to assess pharmacy niche performance.

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Nationwide

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Adapting to a changing marketplace

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Digest Methodology

• Summarizes data from independent pharmacies nationwide

• Independent owners having completed at least one year of operations with dispensing business are asked to participate

• Electronic data collection• Self‐administered survey; data from 2013• Data analyzed and published

– Public and Member version– Geographic region, third‐party volume, location comparisons

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Sales

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Prescription Volume

2009 2010 2011 2012 2013

RxVolume

64,635 64,169 62,969 62,583 62,424

Mean Rx charge= $57.50 (up from $56.04)54% refills, chronic medications

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Generic Prescriptions

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Third‐Party Prescriptions

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Sales

92% prescription sales

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Pharmacy Operations

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Payroll Expenses

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Cost of Dispensing

= Total annual costs allocated to Rx department

Total annual number of Rxs dispensed

• All pharmacies= $11.17, down from $11.96

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Technology

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Quiz

• Total average sales in independent community pharmacy _____________ in 2013.

– A. increased

– B. decreased

• Independent community pharmacists continue to increase their expenses and cost to dispense to make sure that they are providing excellent service. – A. True

– B. False

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Niche Markets

• Pharmacists are health care providers

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Patient Care Services

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Disease State Management Services

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Technology to Engage Patients

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MTM Services

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Adherence

• 67% offer adherence services

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Medication Synchronization

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Medication Synchronization

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Niches

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Health Care Team

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Health Care Team

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Health Care Team

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Health Care Team

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Changing Healthcare Marketplace

• Medicare Part D Star Ratings

• Equipp

• Network decisions

• Pay for performance

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Case Study

• Your pharmacy decides to implement a medication synchronization program.

– How might this program improve sales in your pharmacy?

– How might this program affect your prescription volume?

– How might this program affect your payroll expenses?

– How might this program affect performance measures that CMS or others are wanting to measure?

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Financial Trends

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Comparison of Average to Top 25%

• Top 25% have lower cost of goods sold, lower payroll expenses, and lower operating expenses as percent of sales and thus have higher gross profits before taxes.– Products with higher gross margins– Very selective on third‐party contracts– Efficient and productive employees– Mindful of operating expenses– Good relations with wholesaler; take advantage of opportunities to lower cost of goods sold

– Attentive to pricing strategies

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Benchmarking

• Importance of benchmarking

• Benchmarking tools

– Income and expense or P&L statement

– Balance sheet

– Trend analysis

• Statements and ratios– Evaluate past performance for the store

– Compare with peers‐ DIGEST (average, Top 25%, subgroups)

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Key Financial Outcomes

• Profitability ‐‐ How effective have resources been used?

– Gross margin percentage

– Expense control

• Productivity ‐‐ Staff efficiency

• Financial Position ‐‐Managing assets and controlling debt

• Cash flow ‐‐Working capital; liquidity and solvency

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Benchmarking Calculations

• Sales per employee=Sales/number of employees including owners

• Sales=$5,000,000

• Employees= 9

• Sales per employee=__________

– Digest for 2013

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Benchmarking Calculations

• Current assets=$750,000

• Current liabilities= $250,000

• Current ratio=………………..

• Current ratio= Current assets

Current liabilities

=

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Benchmarking calculations

• =Cost of goods sold/Inventory

• Cost of goods sold=$3,000,000• Inventory=$300,000• ITOR=…………………

• Digest Inventory turnover– Technology– Wholesaler/cost of goods sold– Pricing‐sales

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Leaders in Patient Care

• Blount Specialty Pharmacy in Blount County, Tennessee

• Southrifty Drug in Southampton, New York

– Community leader, take back drug program

• Dave Willink, new owner of Village Pharmacy

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Leaders in the Community• Shaping policy‐ 50% of owners have direct personal relationships with a state representative or staffer; 7% of owners hold an elected office

• Supporting community‐35% of owners provide monetary support to 10 or more community organizations

• Developing business‐28% of owners are members of a local business association

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• Thank YOU for participating in survey

• Cardinal Health for funding

• NCPA staff

Acknowledgments

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Conclusion

• Community pharmacists are leaders in patient care and innovative practice. They have great stories to tell about the many ways they care for their patients.

• Community pharmacists are maintaining their financial health while adapting to the changing health care environment. They continue to find market niches and expand their patient care services to improve healthcare in this country.

• Community pharmacists are capitalizing on opportunities like the Medicare Part D Star Ratings and demonstrating their value as a member of the health care team.

NCPA Digest, sponsored by Cardinal Health: A Guide to

Improved Pharmacy Practice

Richard A. Jackson, Ph.D.

Professor Emeritus, Mercer University College of Pharmacy and Health SciencesPresident, Community Pharmacy Consulting, Inc.

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Disclosure

Richard Jackson is the President of Community Pharmacy Consulting. Mr. Jackson received an honorarium for this workshop. The conflict of interest was resolved by peer review of the slide content.

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Improving Your Financial Picture

More Profits

Transferring Ownership

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Improving Your Financial Picture

More Profits

Transferring Ownership

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WHEN IS THE BEST TIME TO ANSWER A QUESTION?

Answer: Before You Have To

WHEN IS THE BEST TIME TO SOLVE A FINANCIAL PROBLEM IN YOUR PHARMACY

Answer: Before You Have To

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Have an Annual Physical Exam

Conduct an Annual Fiscal Exam

At Least Once a Year

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Normalization of Data Three Sets of Books (financials)

For the Bank (Look Good)

For the IRS (Look Bad)

For the Owner (Look Real)

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Financial Analysis

Comparative Analysis

Ratio Analysis

Identify Problems

Describe Solutions (Action Plan)

Define Measurable Outcomes (Goals)

Measure Success

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Comparative Analysis Income Statement

Express Each Component of the Income Statement as a Percentage of Sales

Compare to NCPA Digest Averages and Top 25%

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Income Statement Analysis

Cost of Goods Sold

Expenses (Especially Personnel)

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Comparative Analysis Balance Sheet

Express Each Component of the Balance Sheet as a Percentage of Total Assets

Compare with NCPA Digest Averages and Top 25%

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Financial Ratio Analysis

Profitability Ratios

Productivity Ratios

Financial Position Ratios

Cash Flow Ratios

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Profitability Ratios

Net Profit Percentage

Net Income $ (Net Profit plus Owner Salary)

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Productivity Ratios

Sales/Employee

Staff Salaries/Employee

Rx Sales/Sq. Ft.

Other Sales/Sq. Ft.

Total Sales/Sq. Ft.

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Financial Position Ratios

Sales/Assets

Return on Investment (Net Profit/Net Worth)

Debt/Net Worth

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Cash Flow Ratios

Current Ratio

Quick or Acid Test Ratio

Inventory Turnover

Rx Inventory Turnover

Accounts Receivable Turnover

Accounts Payable Turnover

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Areas For Improvement

Profit

Cost of Goods Sold

Expenses

Cash Flow

Accounts Receivable

Accounts Payable

Inventory

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Improving Profit Cost of Goods Sold

Caveat: Even Small Differences Significant Too high, not indication of too much inventory

Beginning Inventory+ PurchasesCost of Goods Available for Sale‐ Ending InventoryCost of Goods Sold

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Improving Profit Cost of Goods Sold

Modify Pricing

Evaluate Source of Supply

Cash/Quantity Discounts

Shoplifting/Pilferage

Evaluate Third Parties

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Third Party Dilemma Economics 101

In the long run, small business variable expenses do not increase in a linear fashion but stepwise.

Greatest variable expense is payroll.

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Elementary Example

100 Rx’s/day

Third party contract (Cost + $2.50) increases volume 10 Rx/Day to 110 Rx/Day

Add 3 more contracts one at a time (Now 140/day)

Hire part‐time pharmacist 2 hours a day for $50/hour.

Increased work 40%, same income

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Improving Profits Expense Control

Personnel (Salaries and Wages)

Greatest Expense

Example: Decrease payroll from 10% to 9% of sales and increase net profit $40,000 or over 30%

To Decrease Payroll

Decrease Employees

Decrease Hours of Employees

Decrease Hours Pharmacy Open

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Improving Cash Flow Accounts Receivable

Accounts Receivable Collection Period: Days to collect average account/third party.

AR Turnover = Credit and Third Party Sales/AR

ARCP = 365/AR Turnover

Usual Value is 15 Days

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Reasons for Value Over 15 Days:

Too Liberal Extension of Credit

Poor Collection Policies

Late Paying Third Parties

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Example:

Credit and Third Party Sales = $2,000,000

Accounts Receivable = $109,589

AR Turnover = $2,000,000/$109,589 = 18.25

ARCP = 365/18.25 = 20 days

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To what would accounts receivable of $109,589 have to be reduced to produce an acceptable ARCP of 15 days?

AR Turnover = 365/15 = 24.5

AR Turnover = Charge and TP sales/AR

24.5 = $2,000,000/AR

Therefore, AR = $81,632

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How to Reduce Accounts Receivable

More Selective Credit Extension

More Aggressive Credit Collection

Evaluation of Third Party Plans

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Improving Cash Flow Accounts Payable

Normal is 15 ‐25 Days

Reasons for Too High Value (Low Cash)

Due to:

High Accounts Receivable

High Inventory

Low Profits (High COGS, High Expenses)

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Accounts Payable Collection Period: Days to pay average accounts payable.

AP Turnover = Annual Purchases/AP

APCP = 365/AP Turnover

Usual Value is 15 ‐ 25 Days

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Example:

Purchases = $1,000,000

Accounts Payable = $82,684

AP Turnover = $1,000,000/$82,684 = 12.1

APCP = 365/12.1 = 30.1 days


Example:

Purchases = $1,000,000

Accounts Payable = $82,684

AP Turnover = $1,000,000/$82,684 = 12.1

APCP = 365/12.1 = 30.1 days

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To what would accounts payable of $82,684 have to be reduced to produce an acceptable APCP of 25 days?

AP Turnover = 365/25 = 14.6

AP Turnover = Annual Purchases/AP

14.6 = $1,000,000/AP

Therefore, AP = $68,493

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How to Reduce Accounts Payable

Increase Cash

Decrease Accounts Receivable

Decrease Inventory

Increase Profits (Decrease COGS and Expenses)

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Improving Cash Flow Inventory

Largest Investment in Community Pharmacy

Average Inventory

Average Inventory Turnover

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Inventory Turnover = Cost of Goods Sold/Inventory

Example:

Cost of Goods Sold = $3,200,000

Inventory = $400,000

Inventory Turnover = $3,200,000/$400,000

Inventory Turnover = 8.0

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To what would inventory of $400,000 have to be reduced to produce a more acceptable inventory turnover of 10.0?

Inventory Turnover = COGS/InventoryIf Inventory Turnover = 10.0 then,10 = $3,200,000/InventoryTherefore, Inventory = $320,000A Reduction of Approximately $80,000 or $6,666 per month for 12 months

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How to Reduce Inventory

Open to Buy (OTB) Budget


How to Reduce Inventory

Open to Buy (OTB) Budget

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Open To Buy Budget

Entire Pharmacy

Department

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Open To Buy Budget

Determine monthly Purchase Budget to:

Maintain desirable inventory level

Achieve desirable inventory level

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Personal Purchase Budget

Monthly income previous month

Expenditures previous month

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Open‐to‐buy Budget: Based On Previous Months

Sales

Purchases

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Open‐to‐buy Budget Adjusted Each Month

Sales previous month compared to expected sales

Purchases previous month compared to amount budgeted to purchase

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Open To Buy Budget Example For October

Projected sales this year: $200,000

COGS = 75%

Unadjusted Purchase Budget: $200,000 X 0.75 = $150,000

Assume Inventory at Desirable Level

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Unadjusted Purchase Budget

Amount of inventory to purchase (at cost) to replace “expected” sales

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Adjustments To UPB

Sales previous month compared to expected sales

Purchases previous month compared to purchase budget

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Adjustment For Sales

Actual sales previous month (September) = $180,000

Projected sales = $200,000

Difference = $20,000

Didn’t sell as much as projected

Therefore, purchase less this month

Adjustment = $20,000 x 0.75 = $15,000 (minus)

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Adjustment For Purchases

Purchase budget previous month (September) = $160,000

Actual purchases = $150,000

$160,000 ‐ $150,000 = $10,000 (plus)

Need to purchase ($10,000) more this month

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Adjusted Purchase Budget

Unadjusted purchase budget = $150,000

Adjusted for sales = Minus $15,000

Adjusted for purchases = Plus $10,000

Total adjustment = Minus $,5000

Adjusted purchase budget for October: $150,000 ‐ $5,000 = $145,000

To reduce $80,000 in year, reduce each month’s purchase budget $80,000/12 or $6,666.

Therefore purchase budget for October is $145,000 ‐$6,666 or $138,334.

RULE OF THUMB VALUATION FORMULAS*FOR AVERAGE PHARMACY

25 % of Sales

Return on Investment (ROI) or (NP/0.20)

Net Profit X 5

15% of Sales plus Inventory

1.5 (Net Profit + Owner Salary) + Inventory

*multipliers and % vary with net profit

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Example Community Pharmacy

Sales $3,000,000 (100%)

COGS 2,340,000 (78%)

Gross Margin 660,000 (22%)

Expenses

Owner Salary 110,000 (3.7%)

Payroll 282,000 (9.4%)

Total Expenses 510,000 (17.0%)

Net Profit 150,000 (5.0%)

Inventory: $200,000

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Impact On Selling Price

Decrease COGS 1% to 77%

OR

Decrease Payroll 1% to 8.4%

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Now

Decrease COGS 1% to 77% OR

Payroll 1% to 8.4% ($30,000)

Decrease COGS 1% to 77% AND

Payroll 1% to 8.4% ($30,000)

X(NP + OS) + Inventory

$590,000 $693,000 $808,000

Average $685,000 $823,250 $964,500

Difference $138,250 $279,500

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Now

Decrease COGS 1% to 77% OR

Payroll 1% to 8.4% ($30,000)

Decrease COGS 1% to 77% AND

Payroll 1% to 8.4% ($30,000)

% of Sales $750,000 $900,000 $1,050,000

ROI/NP $750,000 $900,000 $1,050,000

% Sales + Inventory

$650,000 $800,000 $950,0000

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In Summary: Ways To Use Benchmarks

Improving Profit Decreasing Cost of Goods Sold Decreasing Expense (Personnel) Improving Cash Flow Increasing Cash Decreasing Accounts Receivable Decreasing Accounts Payable Decreasing Inventory

116th annual convention - ncpa · 116th annual convention date: tuesday, october 21, 2014 ......

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