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By Bryan Prescott, PharmD, MBA, PCCA Director of Business Coaching Services
Successful pharmacy owners know staying ahead requires more than just efficient operations, great people and solid marketing; it demands a deep understanding of your company's performance relative to industry standards and peers. Financial benchmarking is a powerful tool, offering pharmacy owners a strategic way to assess their financial health and identify areas for improvement.
Financial benchmarking is the process of comparing a company’s financial performance against industry averages and competitors, allowing companies to evaluate their performance objectively. It involves analyzing various financial metrics and ratios to gain insight into the organization’s efficiency, profitability, liquidity and overall financial health. By comparing financial metrics, such as revenue growth, profit margins and return on investment, with industry benchmarks, pharmacies can identify areas where they excel or lag. Additionally, by aligning objectives with industry benchmarks, pharmacies can set realistic and achievable targets.
The National Community Pharmacists Association (NCPA) publishes the Digest yearly, which offers financial and operational comparisons of independent pharmacies. Compounding is mentioned in the Digest, but revenues, expenses and financial ratios are primarily representative of traditional retail pharmacies and not compounding pharmacies.
Financial data is markedly different for compounding pharmacies compared to traditional retail pharmacies. Nonetheless, CPMS finds it useful to structure its managerial accounting reports in a manner consistent with the Digest. CPMS gathers data from compounding-only (or compounding-mostly) pharmacies as well as hybrid (compounding plus retail) pharmacies.
Compounding-only pharmacies are segregated based on number of compounds dispensed per month. CPMS designates pharmacies dispensing 1,000 or more compounds per month as large practices and pharmacies dispensing less than 1,000 compounds per month as small practices.
The tables below represents the benchmark averages for compounding pharmacies dispensing 1,000 or more compounds per day. Like the NCPA Digest, CPMS comparisons are constructed using a 12-month time period based on the January to December calendar year.
Financial ratios are also compiled for both large practices and small practices. This allows each compounding pharmacy to compare itself to other compounding practices of similar size and maturity. These ratios give useful insight to bankers and investors as to which pharmacies make efficient use of assets, manage risk and manage cash flow.
Buyers who seek to purchase pharmacies will use the ratios to determine what multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) before they make an offer on a pharmacy looking to be acquired. A pharmacy that falls below the average in these metrics may be offered EBITDA x 3, while a pharmacy that reports above the average may be offered EBITDA x 5 or better. Obviously, the bigger the multiple, the better the offer price.
Financial benchmarking is not just a tool for evaluation; it's a compass guiding businesses toward informed decision-making and sustainable growth. It is also a valuable tool in determining the selling price of a pharmacy. If you are interested in having this type of evaluation performed for your pharmacy, please contact Bryan Prescott at bprescott@pccarx.com.