Practical ways to increase the business bottom line

There are four key areas to look at if you are a pharmacist running your own retail pharmacy and you want to improve profits. These are your:

• Business strategy.
• Marketing.
• Financial controls.
• Business management.

Business strategy

Do you identify with the following statements? I work long hours… There aren’t enough rewards… I’m so busy working in my business that there is no time to plan ahead or formulate a clear vision of the future… I’m worried about the changes happening to pharmacy and how I will cope with these on top of everything else…

So what’s the answer? The first step is to take some time out from the pharmacy and make an objective assessment of the business. From here you can start to think creatively about the business and what you want

to achieve from it. Ask yourself these searching questions, and be honest with yourself:

• Am I happy with what I am doing in the business? If not, how do I want to change this?
• Do I have enough time away from the business? If not, how can I change things to achieve this?
• Where do I see the business in five years? How does this fit in with what I personally wish to achieve?
• What are the most important things to me, and what stops me doing those things?

Draw up a strategic five-year plan. This will typically include how the business might look in five years time. You should incorporate:

• The services and products provided to your customers.
• Your customer base and geographical area.
• The size of your business, including turnover, gross margin, profitability, number of retail outlets, and staffing requirements.

Part of the process should include a five-year financial plan to show the business growth and profitability. For pharmacy businesses the key figures to include are:

Turnover, broken down into NHS and OTC.

• Gross profit.
• Business expenses.
• Net profit.

Also include an estimate of the goodwill value now and in five years time. You may also wish to incorporate an exit route into your plans. This will depend on what stage you are at in your pharmacy career.

So how does the five-year plan help increase profits? It makes you recognise where you are now, and where you want to be in five years’ time. It should enable you to identify what you need to do to get there.

Marketing

What are you doing to attract more customers and to retain the existing ones? As part of your strategic plan you will have reviewed your customer base and their needs. Did you also look at where the prescriptions come from; the location of GP surgeries; your relationship with local doctors; whether there is anything in the pipeline that could affect future numbers of prescriptions? Other points to consider are:

• Location: Taking into account the limitations and restrictions imposed by the control of entry regulations on pharmacies, is your business in the best location? Bearing in mind competitors, doctors and customers, are there any options open to you for improving your location? If you do consider moving you need to budget for all the costs involved, and balance these against your estimate of the resulting increase in trade.
• Existing products and services: Make a list of the main product categories you sell, and within them the product lines you keep in stock. Have a look at the turnover of these monthly, quarterly, annually. What is the gross profit margin? Does your stock accurately reflect the needs of your customers? Which are your fast moving lines and which are the most profitable of these? Could stocking other brands increase the gross profit? Look at your merchandising and displays. Are the products placed to best advantage to obtain maximum sales?

For most pharmacies the prescription side of the business accounts for the largest part of the business turnover. Are the prescriptions mainly NHS? Do you dispense any private scripts? Do you provide services for drug misusers or nursing homes? (Many pharmacists do not wish to provide services for drug addicts, but if you do it can help to increase your gross margin.) Nursing home services may or may not be profitable. Before taking on a nursing home carefully work out what it will cost you to service it. Don’t forget staff time, delivery costs in terms of drivers and vehicle costs. If you already deal with nursing homes isolate the turnover applicable to these, calculate the gross margin and then deduct the costs applicable to this service and see how profitable this work is. Pharmacy owners can often be surprised to discover that nursing home services are actually loss making.

What other services do you provide? What could you provide? Perhaps you have surplus space in your premises that could be utilised. Such rooms can be rented out for other healthcare services, chiropodists, for example.

Train your staff to ask customers the right questions. By making sure that their needs are met, customers will feel that they have received an excellent service and this will help to build loyalty. At the same time, by fully understanding your customers’ requirements, additional sales  can be made.

• EPoS: This could be a key element in increasing your profits. Many community pharmacists dismiss EPoS because of the cost and time needed to effectively implement such a system. The benefits and savings that can be achieved could far outweigh these two factors. The key benefits are:
• Improved cash flow.
• Improved gross margin.
• Automatic re-ordering of stock.
• Low profit areas highlighted: what is and isn’t selling.
• Pre-set reports providing analysis of profit margins and highlighting shrinkage.
• Price monitoring and quick implementation of price changes.
• Identification of over and under stocking of products and lost sales.

If you are thinking of introducing a customer loyalty scheme, EPoS makes this easier to achieve. But like any IT system, EPoS is only as good as the information you put into it. If you are going to install an EPoS system it must be correctly set up and all relevant information correctly entered. You also need to invest time in learning how to use it effectively.

• Customer loyalty schemes: A way of encouraging your customers to return regularly to your business is to have a loyalty scheme. There are a number of different ways in which these can work. One example is to have a points system, where points are earned every time the customer purchases items in the shop. These points can be redeemed at certain times of the year by way of discount against other items purchased in your pharmacy.
• Advertise your business: This can be done by producing leaflets that are handed out to customers in the pharmacy, leaflet drops to local residents, adverts in local papers and so on. The leaflets can be informative and/or used to advertise specific products or services. Do you advertise your business on the internet?
• Give the business a facelift: When was the last time the shop had a refit? Many pharmacies have not had a refit for years and look tired and shabby. Most successful pharmacy owners that I meet carry out refits regularly, often around every seven years. There is no question that regular refits increase trade and, therefore, profitability. If you are not ready for a refit, at least have an objective look at your premises. Start from the outside. Is it the sort of place you would want to shop in? Are the windows clean and is the paintwork smart? How does it look inside? Is it old and shabby, or clean and tidy? What can you do to improve the image? When was the last time the shop was decorated? Are the floor coverings worn? As a healthcare provider and with increasing competition all these points are important. You want customers to enjoy the experience of visiting your premises so that they return again.
• Plan of action: Draw up a plan that you can use to review and improve your business. It is important to include the review points, action you will take and a date by which you will have completed the task. A typical plan may look like this:

Action      Completion date

Stock: aim to improve gross margin by  2% by better purchasing and stock control         1/12/ 10       

Staff training: set up monthly training sessions to improve customer care         1/1/ 11

Leaflets: prepare information sheets for customers     1/2/ 11

Premises: minor refit        1/3/ 11

Your action plan may be considerably more detailed. For instance, taking the last item – giving the premises a minor refit – you may wish to break a task like this down into a series of action points such as:

• Discuss requirements with shop fitters.
• Set budget.
• Arrange for quotes.
• Arrange bank finance.

Each of these action points will then have its own completion deadline. The important point about having a written action plan with deadlines is that it will help you focus on the tasks and work to a specific timescale.

Financial controls

The starting point is to review your current accounting system. Whether you do the bookkeeping yourself or employ an outside bookkeeper your system must allow you to extract certain key data. A basic bookkeeping system will enable you to produce monthly VAT returns and reclaim VAT, which is good for cash flow. If you are still submitting quarterly VAT returns it is time you went monthly!

One way of increasing your profits is to have a good financial management system in place. This will consist of a computerised bookkeeping system with data input by someone appropriately skilled. There is no point in having a system that contains incorrect information, or a software package that you do not understand and from which you cannot extract the relevant figures. One way of dealing with this is to have a bookkeeper or accountant who sets up the system, inputs all the information and provides you with the key figures and reports each month. This way you are able to utilise your time, both working in and on the business, in a more effective way.

Questions you should ask yourself about your current accounting system could be:

• What do I like about it?
• What don’t I like about it?
• What information do I want the system to provide? It may be helpful to discuss this with your accountant.

The sorts of financial information that will be of help to you are:

Profit and loss account

This should be up to the month and the year-to-date. It is helpful if this also shows each item as a percentage of turnover. For example, turnover for the month £60,000; salary costs £3,000. As a percentage of turnover this would be: 3,000/60,000x100 = 5%. Make sure that turnover is analysed by category such as NHS and OTC.

Balance sheet

This will provide you with an overview of the current financial health of the business, and give a breakdown of various items such as:

• Creditors list (unpaid bills).
• Outstanding debtors (amount owed to you, which will be mainly NHS payments).

Break-even analysis

If you are acquiring a new business or struggling with cash flow for an existing pharmacy, a way of calculating what your minimum turnover should be in order to meet all your business costs is to work out your break-even point. This can be done quite easily if you know your gross margin.

Add up all your business expenses including your own salary/drawings. Divide the total by your percentage gross margin. For example:

Cost/expense                           Per annum

Rent and rates    £10,000
Salaries    £20,000
Locum    £5,000
Phone    £700
Light and heat    £1,100
Bookkeeping and professional fees    £3,000
Advertising    £500
Bank charges and interest    £1,500
Depreciation    £2,000
Your salary/drawings including tax    £50,000

Total    £93,800

If your gross profit margin is 25 per cent, the turnover that you will need to meet these costs is: £93,800/25% = £375,200 per annum.

For simplicity the above example has totally ignored VAT (in fact you will receive regular VAT refunds) and it does not include an exhaustive list of expenses or items such as capital repayments for loans.

Using financial information to increase profits

Once you have the basic financial information you need, you can use this to help improve business performance by:

• Accurately measuring how you are doing. Ask your accountant to benchmark your business against other pharmacies.
• Monitoring and controlling your costs.
• Forecasting ahead and preparing budgets for forthcoming expenditure.
• Monitoring progress. For example, if you have set a target to increase your gross margin by X per cent, you can monitor the effectiveness of your efforts through your monthly financial data.
• Using the data for ‘what if?’ scenarios. For example, what if:
• I increase my OTC sales by 10 per cent next year, how much will my gross profit increase?
• I reduce my staff costs by 5 per cent?
• I take on two new nursing homes?
• I let the spare room at the back of the pharmacy to a chiropodist?

If you are adept at using a spreadsheet you can set up a format to do the calculations for you. Alternatively ask your accountant to do it. Using the data as a basis for your future financial strategy.

Business management

Effective management of the business will improve your profits. Why? Because businesses with proper systems in place operate more efficiently and provide a better quality of customer service. How successful a community pharmacy is will depend on how good the management is in supplying its customers’ needs on a timely basis in a pleasant environment, with the aid of helpful and knowledgeable staff.

Part of the management process involves setting standards and procedures for everyone in your business to follow. Pharmacists should be familiar with standard operating procedures (SOPs) and will appreciate that they are a good way of implementing tighter management controls.

Pharmacists wanting to know more about SOPs and general business management may be interested in contacting the NPA at www.npa.co.uk who have a vast amount of information available.:


Every pharmacy business should have SOPs for staff covering issues such as training, roles and performance, stock ordering and checking. Before you start writing them take some time to consider the most important aspects of your pharmacy, your objectives in writing the SOP and the best way of meeting these. When the SOP has been written give it to your staff for comments and feedback. It is important that staff identify with what you are trying to achieve and are receptive to any changes you are making. There is no point in your SOPs gathering dust on a shelf: everyone must buy into the concept that these procedures are for their benefit as well as for the success of the pharmacy. Demonstrate how SOPs, for dispensing procedures, staff training and stock control, will make the business more profitable. SOPs will help your pharmacy to run efficiently in your absence and allow you time to focus on developing the business.

Looking at each of the examples more specifically:

• Dispensing SOP: Locums will understand how they are expected to operate in your pharmacy, and what roles the support staff perform. The SOP will help the locum maintain the high standards and quality that you would expect. Consistent quality will add to customer satisfaction and retained customer loyalty.
• Staff training SOP: Training in customer care and providing product knowledge will enhance the service that staff provide to your customers, and encourage more sales and repeat business.
• Stock control SOP: Who is responsible for stock now? If you deal with this yourself, an SOP should allow you to delegate this job to a member of staff safe in the knowledge that stock will be ordered as required; on time; checked against delivery notes on receipt; checked for damage; obsolete stock will be identified and proper stock records kept.

There is an SOP for writing SOPs. Each should include:

• The purpose: what you want to achieve.
• The scope: what precisely is covered in the SOP.
• Responsibility: who is going to carry out the task and if that person is unavailable who will be responsible under those circumstances.
• The task: this should include a detailed description of how the job is to be performed.
• Review procedure: your system for routinely checking that the SOP is being correctly carried out.

The overall benefit of SOPs is that they allow you to introduce systems and procedures into your pharmacy, which will help your business run more efficiently and enable your staff to carry out their work to a consistent high standard. If you are already adopting SOPs in your pharmacy this may be an appropriate time to review them, discuss them with the staff and see how they can be improved.

But back to profits. Unfortunately there is not one simple way to massively increase profits. It takes a systematic approach, which involves good business management, financial monitoring, successful marketing and a strategy for your business. If you find the prospect of tackling all these items together too daunting, break it down into small chunks. You may be familiar with the question: “How do you eat an elephant?” The answer is, of course: “One piece at a time”.