Pharmacy U

Pharmacists – it’s time to crunch your numbers!

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Two chronic afflictions can kill your retail pharmacy business – too much inventory and high overhead. If they get out of control, either one can ruin your business. Today, you have no excuse for losing control.

by Gerry Spitzner

What will you do, on a regular basis, to make sure they don’t? The good news is that with today’s affordable computerized business systems, you can rid yourself of these two afflictions. However, simply implementing the systems is not enough. You must take the time to do the maintenance, study the numbers, then put words to the numbers and take decisive action.

Inventory is your main source of revenue

One of the most important aspects of every item-based retail business is your inventory. It’s your main source of revenue, so it’s crucial to make smart decisions about how much inventory you have, how much you should store, and how much to reorder. Another affliction that can cause as much of a problem as too much is too little inventory. Not having enough inventory causes image issues as well as lost sales. Both have a profound effect on customer experience.

One way to help ensure that you always have a good balance of inventory is to use software specifically designed to manage item-based businesses. For the software to generate the right amount of replenishment inventory, you must do systematic maintenance of your computerized inventory management system. Conduct regular SKU cycle counts to keep your POS inventory management system up to date with the correct on-hand inventory and make adjustments to minimum or maximum inventory levels, along with ensuring accurate lead times. Often these basic maintenance functions are ignored or overlooked. If not maintained, your system can get out of whack very quickly and result in your replenishment system’s suggesting too much, too little or no inventory at all.

Other tools in your POS system effective for managing inventory include establishing an open-to-buy budget process and regular review of aged inventory reports. The value and quality of your product decrease the longer you keep it in stock. Your priority has to be to sell your inventory after it’s received.

Controllable versus uncontrollable expenses

There are two main types of overhead expenses in your retail pharmacy – controllable and uncontrollable. Knowing how to effectively manage each is key to profitability.

There are many tools you can employ to help control expenses, for example, a good store policy manual describing lighting and temperature settings for winter and summer. Even something as simple as replacing older light bulbs and ballasts with newer, more efficient models can help control expenses. Most systems provide exception reports that highlight variances to plan and compare year over year.

Carrying excess inventory has significant costs. One of the highest for many companies is financing the purchase and holding of inventory. Also, the more inventory you hold, the more you have to spend on labour to manage it, space to hold it, and in some cases, insurance to protect against its loss or damage. Physically counting and monitoring the levels of inventory you hold also takes time and incurs costs.

You cannot “cut” your way to profitability

When a retail pharmacy gets into trouble financially, often the owners try to “cut” their way to profitability by reducing expenses or controlling costs to achieve a profit. The trouble with this is that the biggest expenses are usually not controllable (rent, salaries), therefore the expenses being cut (employee hours or benefits) directly impact the customer experience and inventory system maintenance, creating a cycle of decline. Remember, it is not the P&L (profit & loss statement) at the end of the month that matters, it is the cash flow you have during the month.

Retail pharmacy is a cash-flow management business

You have to become an expert at managing cash flow. This is done by balancing your approach to expenses and inventory. First, make sure you aren’t tying up cash flow with unchecked, escalating controllable overhead expenses. Second, recognize that the more inventory you have on hand, the greater the amount of the business’s capital that’s tied up. You risk slowing down your cash flow if either isn’t managed.

Very few of us love spending time on the “numbers,” but if we don’t understand our numbers…we don’t understand our business. Don’t let too much inventory or high overheads “kill” you.

 

Gerry helps pharmacists and other healthcare practitioners develop winning business management strategies for their practice so they can focus on patient-centred care. To learn more about his approach contact him at gerry@pharmacysos.ca or visit http://pharmacysos.ca/