NATIONAL COMMUNITY PHARMACISTS ASSOCIATION

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Financial PositionManaging Assets and Controlling DebtManaging assets and controlling debt enhances financialposition. By efficiently managing assets, the amount ofsales and profits generated from the pharmacy’s investmentin assets increases. The largest and most important asset tothe independent community pharmacy is its investmentin inventory and is more thoroughly evaluated in the nextsection—Cash Flow. Here we assess the overall asset efficiencyconsidering all assets of pharmacies. Asset Efficiency RatiosFor purposes of this study, we measured asset efficiencyusing the sales to assets ratio. Refer to the Guide to Benchmarkingfor a review of how this ratio is computed andinterpreted. You can download the Guide by visiting www.ncpanet.org/members/digest.php.Sales toassetsDebt ManagementOverall, pharmacies had low risk as measured by thedebt to worth ratio. The debt to worth ratio for theTop 25 Percent shows that for every dollar owners haveinvested in their business, the creditors have providedabout 20 cents as compared to 48 cents for all pharmacies.The Top 25 Percent is “less risky” as measured bythe debt to worth ratio.Return on investment (ROI) decreased in 2008 forindependent community pharmacies. For every dollarowners invested, they earned 23 cents in net operatingincome, which is worse than 2007 but better than 2006.Alternatively, ROI for the Top 25 Percent increased in2008 from 45.8 percent to 63 percent. The return oninvestment ratio for the Top 25 Percent shows that forevery dollar the owner has invested in the business, theyM E D I A N FO RM E D I A N FO Rearned about 63 cents in net operating income afterA L L P H A R M AC I E STO P 2 5 P E R C E N T compensation to owners but before tax. This compares2006 2007 2008 2006 2007 2008 to only 23 cents for all pharmacies. Even though the$5.44 $5.09 $5.47 $5.53 $5.19 $5.66 Top 25 Percent are operating with more of their ownmoney (a bigger investment), their higher profits resultM E D I A N FO R A L L P H A R M AC I E SM E D I A N FO R TO P 2 5 P E R C E N TRatio Computation 2006 2007 2008 2006 2007 2008Debt to worth Total liabilities ÷ Net worth 0.53 0.66 0.48 0.3 0.3 0.21Return on investment Net operating income ÷ Net worth 16.7% 30% 23% 43.5% 45.8% 63%SA L E S P E R E M P LOY E E142009 NCPA Digest, sponsored by Cardinal Health
Cash FlowManaging Working CapitalThe amount of working capital, or cash flowing throughthe business, indicates liquidity. The current ratio is acommon benchmark for measuring cash flow or liquidity.This ratio shows that the Top 25 Percent have $4.43 incurrent assets on hand for every $1.00 in current liabilities,and all pharmacies have $3.60 in current assets on handfor every $1.00 in current liabilities. The quick ratio is theother ratio that measures the companies’ ability to generatecash quickly—without selling inventory. The Top 25Percent had $2.47 in cash and accounts receivable on handfor every $1.00 in current liabilities compared to $1.55 forall pharmacies.Both the current ratio and quick ratio for the Top 25Percent and for all pharmacies increased in 2008. This isan indication that pharmacies may be overcoming someof their cash flow problems. Additionally, due to pressure,third-party plans, including those administering benefitsthrough Medicare Part D, are reimbursing pharmacistsmore timely.Working capital is a cycle of funds moving through thepharmacy. The primary elements of the working capitalcycle are inventory, accounts receivable, and accounts payable.These are the primary uses and sources of cash flow.We typically measure how efficiently the cycle is managedby assessing the number of days cash is consumedby inventory and accounts receivable or provided by tradeaccount creditors (vendors).Inventory was held in stock for 35 days in 2008, 2 daysshorter than in 2007. The accounts receivable collectionperiod also decreased from 22 days to 15 days for allpharmacies and from 19 to 17 days for the Top 25 Percent.This is reflected in the improvement in liquidity. The Top25 Percent continued to pay their bills quicker than themedian for all pharmacies.Inventory ControlThe goal of inventory management is to minimize theinvestment in inventory as sales rise while ensuring thatinventory is available when needed. Benchmarks for assessinginventory are inventory turnover (the number oftimes inventory is used up during the year), and inventoryturn days. Turn days converts the inventory turnover ratiointo the average number of days’ worth of stock on hand.The inventory benchmarks for independent communitypharmacies are displayed below.Prescription inventory for all pharmacies turned fasterthan the overall turnover of all merchandise combined, aswould be expected since over-the-counter medicines andother merchandise tend to turn more slowly. Prescriptionstock stayed on hand for 31 days (compared to 35 daysfor all inventory). The Top 25 Percent maintained similarturnover rates compared to all pharmacies.M E D I A N FO R A L L P H A R M AC I E SM E D I A N FO R TO P 2 5 P E R C E N T2006 2007 2008 2006 2007 2008Cash flow is used for…Inventory turn days 35 days 37 days 35 days 35 days 37 days 37 daysAccounts receivable collection period 19 days 22 days 15 days 19 days 19 days 17 daysFor a total of… 54 days 59 days 50 days 54 days 56 days 54 daysCash flow is provided by…Accounts payable payment days 15 days 16 days 15 days 12 days 15 days 10 daysNet days in cycle 39 days 43 days 35 days 42 days 41 days 44 daysM E D I A N FO R A L L P H A R M AC I E SM E D I A N FO R TO P 2 5 P E R C E N T2006 2007 2008 2006 2007 2008Inventory turnover (annual) 10.3 9.8 10.4 10.6 9.9 10Inventory turnover days 35 days 37 days 35 days 35 days 37 days 37 daysPrescription inventory turnover (annual) 11.7 12.1 11.7 11.3 11.5 10.3Prescription inventory turnover days 31 days 30 days 31 days 32 days 32 days 35 daysOperating Results15
Page 1 and 2: National Community Pharmacists Asso
Page 3 and 4: [October 2009]Dear Valued NCPA Memb
Page 5 and 6: Figures1. Average annual sales (in
Page 7 and 8: Figure 1 • Average Annual Sales (
Page 10 and 11: Operating Results To determine how
Page 12 and 13: Operating Expense ManagementWe eval
Page 16 and 17: Table 2 • 2008 Common-Sized (Aver
Page 20 and 21: ProfitabilityExpense ManagementThe
Page 26 and 27: If a pharmacy is to make a profit,
Page 28 and 29: TABLE 9 • 2008 Common-Sized (Aver
Page 30 and 31: AssetsTABLE 11 • 2008 Common-Size
Page 32 and 33: TABLE 13 • 2008 Median Financial
Page 34 and 35: Geographic SummaryConditions of the
Page 36 and 37: TABLE 16 • 2008 Median Financial
Page 38 and 39: Rural/Metro Pharmacy LocationPharma
Page 40 and 41: AssetsTABLE 20 • 2008 Common Size
Page 42: Common-Sized Balance SheetThe balan

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