Sponsored by Cardinal Health

Financial Benchmarks Sponsored by

Sponsored by Cardinal Health Project Editor Donna West-Strum, RPh, PhD Associate Professor, Department of Pharmacy Administration The University of Mississippi Oxford, Mississippi Project Director and Financial Editor Leon Michos, PhD NCPA Health Care Economist Creative Robert Lewis NCPA Associate Director, Design Sarah Diab NCPA Senior Designer Marianela Guinand NCPA Junior Designer Contributors Chris Linville NCPA Director and Managing Editor America s Pharmacist Copyright 2012 National Community Pharmacists Association, Alexandria, Virginia, USA. All rights reserved. No right of reproduction without the prior written consent of the National Community Pharmacists Association.

Dear Valued NCPA Member: We are pleased to present you with the complete financial information of the 2012 NCPA Digest, sponsored by Cardinal Health. In today s pharmacy environment, it is more important than ever that you take an in-depth look at your pharmacy s financial picture against national pharmacy averages to come up with a real-world strategy for your pharmacy s future. Outlined here is an approach to assist you in successfully integrating the key Digest findings into an action plan for your pharmacy. Step 1: Use your financial statements to assess your present situation and identify any significant trends. If you participated in the survey, then you will receive a free benchmarking analysis from NCPA using the data you submitted. Step 2: Compare your company s current status to: + Your own past performance (prior years financial statements) + Ratios for the Top 25 percent (Tables 14-16) + Ratios for All Pharmacies (Tables 14-16) + Ratios for pharmacies in your sales category (Tables 19-21) Step 3: Identify the strengths and weaknesses of your company and identify possible causes for the problems. Refer to the Guide to Benchmarking available only to NCPA members at www.ncpanet.org. Step 4: Set goals for the year and develop a written action plan for achieving better results. Step 5: Implement your plan and monitor its progress. Review the plan monthly, evaluate its performance and focus on additional areas that may require improvement. Revise the plan periodically if necessary. Step 6: Repeat the entire process, making corrections and adjustments for the differences between actual results and measurable goals. Financial management is an ongoing process, not a short-term project. Step 7: Work with your fellow pharmacists, your internal management team, professional accountant, and outside business advisers to gain the most from their expertise and this process. We know that you will find the information contained in these pages useful for your pharmacy. For more information about NCPA s various management offerings, including continuing education seminars, publications, and web resources, visit NCPA s website at www.ncpanet.org or contact the NCPA Management Institute at 800-544-7447. 2012 NCPA Digest, Sponsored by Cardinal Health 1

Executive Summary... 4 Methodology... 8 Operating Results... 9 Sales Volume Summary... 18 Cost of Dispensing... 23 Third-Party Prescriptions... 25 Geographic Summary... 29 Pharmacy Location Rural versus Metropolitan Locations... 33 Overview of Financial Statements and Performance Measures... 37 Figure 1. Breakdown by Volume of Sales... 4 2. Average Annual Sales (in thousands) per Pharmacy Location, 10-Year Trend... 5 3. Distribution of Pharmacies over Time by Net Profit... 6 4. Breakdown by Sales Dollar All Pharmacies and Top 25 Percent... 9 5. Payroll Expenses as a Percentage of Sales... 11 6. Staff Cost per Employee... 11 7. Payroll Expenses as a Percentage of Sales... 12 8. Sales per Employee by Sales Revenue... 18 9. Staff Cost per Employee by Sales Revenue... 18 10. Payroll Expenses... 19 11. Other Operating Expenses... 19 12. Average Net Operating Income by Sales Volume... 20 13. Summary of Third-Party Prescription Activity, 5-Year Trend... 25 2 2012 NCPA Digest Sponsored by Cardinal Health

Tables 1. Independent Community Pharmacy At-A-Glance... 4 2. Average of Pharmacy Operations... 6 3. Viability of Independent Community Pharmacy... 6 4. Owner s Discretionary Income (As a Percentage of Total Sales)... 8 5. Sales Mix All Pharmacies and Top 25 Percent... 10 6. Gross Profit Margin by Department All Pharmacies and Top 25 Percent... 10 7. Pharmacy Staff Positions... 11 8. Average Rent per Year per Square Foot... 11 9. Percentage of Pharmacies That Utilize a Given Technology by Sales Volume... 12 10. Asset Efficiency Ratios... 13 11. Debt Management... 13 12. Cash Flow... 13 13. Inventory Control... 14 14. 2011 Common-Sized (Average) Income Statement Percentage of Total Sales. 15 15. 2011 Median Financial Benchmarks... 16 16. 2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets... 17 17. Profitability... 19 18. Inventory Control... 19 19. 2011 Common Sized (Average) Income Statement Percentage of Total Sales by Sales Category... 20 20. 2011 Median Financial Benchmarks by Sales Category... 21 21. 2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets by Sales Category... 22 22. Cost of Dispensing by Geographical Region... 23 23. 2011 Common-Sized (Average) Income Statement Percentage of Total Sales by Third-Party Prescription Activity... 26 24. 2011 Median Financial Benchmarks by Third-Party Prescription Activity... 27 25. 2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets by Third-Party Prescription Activity... 28 26. 2011 Common-Sized (Average) Income Statement Percentage of Total Assets by Geographic Region... 30 27. 2011 Median Financial Benchmarks by Geographic Region... 31 28. 2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets by Geographic Region... 32 29. 2011 Common Sized (Average) Income Statement Percentage of Total Sales Metropolitan vs. Rural... 34 30. 2011 Median Financial Benchmarks Metropolitan vs. Rural... 35 31. 2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets Metropolitan vs. Rural... 36 Table of Contents 3

Executive Summary The 2012 NCPA Digest, sponsored by Cardinal Health provides an annual overview of independent community pharmacy, including a comprehensive review of the financial operations of the nation s independent community pharmacies for 2011. Independent community pharmacies are all pharmacist-owned, privately held businesses but vary in practice setting. They include not only single-store operations but other independent community pharmacist-owned operations such as chain, franchise, compounding, long-term care (LTC), specialty, and supermarket pharmacies. In 2011, 13.8 percent of participating pharmacies had total sales over $6.5 million, 30 percent with sales between $3.5 and $6.5 million, 19.2 percent with sales between $2.5 and $3.5 million, and 37 percent with sales under $2.5 million. Breakdown by Volume of Sales 14% FIGURE 1 Independent Community Pharmacy At-A-Glance Table 1 2011 Average Number of Pharmacies in Which Each Independent Owner Has Ownership 1.76 Value of inventory as cost and as a percentage of sales Prescriptions Inventory $240,00 6.2% Other Inventory $38,000 1.0% Total Inventory $278,000 7.3% Annual Rate Inventory Turnover 10.7 Annual Rate of Prescription Inventory Turnover 12.1 Size of area and median sales per square foot Prescription Sales per Square Foot 1,079 sq ft $3,266 Other Sales per Square Foot 2,250 sq ft $136 Total Sales per Square Foot 3,329 sq ft $1,151 Number of prescriptions dispensed per pharmacy location New Prescriptions 28,881 46% Renewed Prescriptions 34,088 54% Total Prescriptions 62,969 100% Average Prescription Charge $56.09 Number Of Hours And Days Per Week Per Location Hours Open per Week 55 Days Open per Week 6 Sales Activity Per Hour Open 37% 19% 30% Prescription Sales per Hour $1,232 Other Sales per Hour $107 Number of Prescriptions Dispensed Per Hour 22 Percentage Of Total Prescriptions Covered By: Government Programs (Medicaid And Medicare Part D) 49% Other Third-Party Programs 38% Percentage of Prescriptions Dispensed Generic 76% $2.5 Million or Less $2.5 to 3.5 Million $3.5 to $6.5 Million Over $6.5 Million 4 2012 NCPA Digest Sponsored by Cardinal Health

In 2011 independent community pharmacy represented an $88.5 billion marketplace, with 92 percent of sales for independents derived from prescription drugs. Although many independents continue to face slim margins from private third-party contracts and government reimbursement programs, independents have strived to reduce their overhead costs by operating a more efficient business, investing in labor-saving technologies, and controlling operating costs. In 2011 there were 23,106 independent community pharmacies providing high quality services greatly valued by patients. An overview of the average independent community pharmacy is provided in Independent Community Pharmacy At-A Glance. In general, the average independent community pharmacy location dispensed 62,969 prescriptions (201 per day) in 2011, which is a slight decrease from last year s prescription volume of 64,169. Total sales decreased this year due to the flat prescription volume, the increased use of lowercost generic medications, and the increased emphasis on 90-day refill prescriptions. Average Annual Sales (in Thousands) per Pharmacy Location, 10 Year Trend 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 $2,855 $3,244 $3,604 $3,612 $3,580 $0 $1,000 $2,000 $3,000 $4,000 $3,831 $3,745 $4,022 $4,026 $3,881 FIGURE 2 Independents continue to operate multiple pharmacies. Twenty-four percent of independent owners have ownership in two or more pharmacies and the average number of pharmacies in which each independent owner has ownership is 1.76. The NCPA Digest, sponsored by Cardinal Health data have been collected for 80 years, providing an opportunity to look at long-term trends for independent community pharmacies. (Go to www.ncpanet. org for the history of the Digest.) Gross margins fell in the 1990s and since 1999 have remained relatively flat at 22 to 24 percent. Average sales per pharmacy location did not increase this year, with a pharmacy location now having less than $4 million in sales on average. + Average sales per location for 2011 was $3,831,481, which is less than in 2010. + Gross margin decreased slightly from 24 percent in 2010 to 22.9 percent in Executive Summary 5

Averages of Pharmacy Operations Table 2 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of Goods Sold 76.5% 76% 77.9% 76.4% 77.2% 76.8% 76.8% 76.2% 76.0% 77.1% Gross Profit 23.5% 24% 22.1% 23.6% 22.8% 23.2% 23.2% 23.8% 24.0% 22.9% Payroll Expenses 13.1% 13.2% 12.2% 13.4% 13.6% 13.7% 13.5% 14.1% 14.5% 13.4% Other Operating Expenses 6.6% 6.8% 6.3% 6.5% 6.4% 6.5% 6.5% 6.4% 6.5% 6.6% Total Expenses 19.7% 20% 18.5% 19.9% 20% 20.2% 20.0% 20.5% 21.0% 20.0% Net Operating Income 3.8% 4% 3.6% 3.7% 2.8% 3.0% 3.2% 3.3% 3.0% 2.9% 2011, but remained in the 22-24 percent range seen over the last 10 years. + Payroll expenses, as a percentage of sales, decreased by 1.1 percentage points in 2011 to 13.4 percent. To keep overall expenses similar to last year, operating expenses had to be carefully monitored. + Through attempts by independents to control operating expenses, the average net operating income remained similar to last year at 2.9 percent. Since sales decreased, the net operating income dollars before tax decreased also. It is important to note that this year s Digest data reflect the marketplace in 2011, the sixth year for the Medicare Part D prescription drug benefit. Similar to 2010, 32 percent of prescriptions in independent community pharmacies were covered by Medicare Part D. Government programs such as Medicare Part D and Medicaid continue to purchase 49 percent of prescriptions sold in independent community pharmacies. Viability of Independent Community Pharmacy Table 3 Net Profit as a Percentage of Sales Distribution of Pharmacies Over Time by Net Profit FIGURE 3 100 80 60 40 20 Percentage of Pharmacies 2011 Accumulated Operating at a Loss 23.6% 23.6% Less Than 2% 22.9% 46.5% 2% to 4% 14.9% 61.4% 4% to 6% 13.1% 74.5% 6% to 8% 12.2% 86.7% 8% and Over 13.3% 100% Independent community pharmacies are working hard to improve their financial position. Historically, before the implementation of Medicare Part D in 2006, an average of 12.4 percent of independent community pharmacies operated at a loss between 2001 and 2005. In 2006 the profitability of pharmacies took a strong 0 2003 2004 2005 2006 2007 2008 2009 4% or more 2% to 4% 0% to 2% 2010 2011 6 2012 NCPA Digest Sponsored by Cardinal Health

hit with 22.9 percent of independent community pharmacies operating at a loss and over 1,100 pharmacies closing their doors. In 2011, a significant proportion of independent community pharmacies again were faced with financial challenges, with 23 percent operating at a loss. This is most likely due to slim gross margins on third-party prescriptions and a decrease in sales. However, some pharmacies found opportunities and were able to realize more than eight percent in net profit. Independent community pharmacists are finding ways to remain financially viable. For example, independents this year controlled their operating expenses, increased the use of technology, and obtained revenue from patient-care services provided. Executive Summary 7

Methodology Independent community pharmacy owners, having completed at least one entire year of operations, were invited to participate in this study. The survey form consisted of a questionnaire focused on demographics and non-financial information, a balance sheet, and an income statement. We have exercised the utmost professional care while compiling the information received. While we have tested the information for clerical accuracy, the data supplied were not necessarily based on audited financial statements. NCPA does not make any assurances, representations, or warranties with respect to the data upon which the contents of this report were based. The information upon which the 2011 portion of the study is based was from fiscal years of January 1, 2011 through May 30, 2012, with 94 percent of the respondents reporting for the year ended December 31, 2011. Results from prior issues of the Digest have been incorporated with the 2011 results to facilitate assessing industry trends. Common-sized (average) financial statements are used to present the financial data in this report. The common-sized statement is computed by determining an average value for the entire group of respondents. The statistics presented in the financial tables entitled Financial Benchmarks represent the median ratios (mid-point) of the group of pharmacies presented. Median ratios indicate a half-way point, thereby dividing all those reporting into two halves: a top half (pharmacies having a ratio higher than the median) and a bottom half (pharmacies having a ratio lower than the median). For more information on common-sized financial statements and median ratios, refer to the Overview of Financial Statements and Performance Measures section. We have isolated the companies that were the most efficient at generating profits from sales and contrasted their results to all participating pharmacies. This group is referred to as the Top 25 Percent. To determine which participants would be included in the Top 25 Percent, the owner s discretionary profit margin for each pharmacy was calculated. Owner s Discretionary Profit Margin = Net profit plus owner compensation before tax Total sales Once each owner s discretionary profit margin was computed, the amounts were listed in order from highest to lowest. The respondents were then separated into quartiles based on their owner s discretionary profit percentage. The Top 25 Percent of the respondents were included in the top quartile. The goal of this process is to segregate the most profitable pharmacies so we can identify the management efficiencies that exist in the Top 25 Percent. Then we can evaluate the differences between pharmacies experiencing differing levels of profitability. For 2011, the various quartiles included pharmacies achieving owner s discretionary profit margins in the following ranges: Owner s Discretionary Income (As a Percentage of Total Sales) Table 4 Top 25 Percent Third Quartile Second Quartile Bottom 25 Percent More Than 10 Percent 6.1 to 9.9 Percent 2.5 to 6.09 Percent Less Than 2.4 Percent Remember: Results for the Top 25 Percent include the companies who earned the highest owner s discretionary profit percentage as discussed above. These are not necessarily the companies having the highest sales. All percentages shown above are reported before tax. 8 2012 NCPA Digest Sponsored by Cardinal Health

Operating Results To determine how the participating pharmacies performed financially, the financial information from the survey was summarized and presented in three basic statements: common-sized income statement, median financial benchmarks, and common-sized balance sheet. These statements are provided in Tables 14, 15,16 respectively. From these tables, we have provided a summary of the results. PROFITABILITY The charts below show what happens to each sales dollar for the average pharmacy versus the average independent community pharmacy in the top 25 percentile. The Top 25 Percent have 8.5 percent in net operating income (compared to 2.9 percent, the average for all pharmacies). Their profit advantage comes from managing cost of goods sold, payroll expenses, and other operating expenses. Gross Profit Margin Over the past few years, gross profit margins have slightly increased or decreased from year to year. For 2011, gross profit margins decreased by 1.1 percentage points. It appears that independent community pharmacy owners attempt to maintain a gross margin of 22 to 24 percent in order to maintain their business. The Top 25 Percent have a 4.2 percent gross profit advantage by managing cost of goods sold and offering of higher margin niche services. Their gross profit margin was 27.1 percent compared to 22.9 percent for all participating pharmacies. All Pharmacies FIGURE 4 Top 25 Percent 2011 Highlights + Average sales for all participating pharmacies was 8.5 percent higher than sales for the Top 25 Percent. Thus the ability to maintain costs and generate profits may be related to the management of the pharmacy and less related to sales volume. + Gross margin decreased in 2011 to 22.9 percent for all participating pharmacies. The Top 25 Percent did not experience a significant decrease in gross profit margin by only decreasing from 27.5 percent to 27.1 percent. The Top 25 Percent had higher gross margins than all pharmacies (at 27.1 percent compared to 22.9 percent for all pharmacies). + Return on investment for all pharmacies again decreased from 19.9 percent to 19.1 percent in 2011. The same trend was seen in the Top 25 Percent also. 13.4% 2.9% 12.9% 5.7% 6.6% 8.5% + For all pharmacies, the current ratio and quick ratio decreased. The Top 25 Percent experienced the same trend. 77.1% 72.9% Net operating income Cost of goods sold Payroll expenses Other operating expenses Operating Results 9

Sales Mix All Pharmacies and Top 25 Percent Table 5 2009 2010 2011 AVERAGE FOR ALL PHARMACIES Prescription sales $3,756,265 93.3% $3,698,748 92.0% $3,532,300 92.2% All Other Sales $269,832 6.7% $323,707 8.0% $299,181 7.8% Total Sales $4,026,097 100% $4,022,455 100% $3,831,481 100% Cost of Goods Sold $3,068,856 76.2% $3,056,793 76% $2,954,072 77.1% Gross Profit Margin $957,241 23.8% 965,662 24% 877,409 22.9% Average For Top 25 Percent Prescription Sales $3,451,085 96.3% 3,263,152 93.4% 3,244,801 92.6% All Other Sales $132,102 3.7% $230,304 6.6% $259,304 7.4% Total Sales $3,583,188 100% $3,493,456 100% $3,504,105 100% Cost of Goods Sold $2,626,848 73.3% $2,534,458 72.5% $2,554,493 72.9% Gross Profit Margin $956,340 26.7% $958,998 27.5% $949,613 27.1% Gross Profit Margin by Department All Pharmacies and Top 25 Percent Table 6 Average For All Pharmacies Average For Top 25 Percent 2009 2010 2011 2009 2010 2011 Gross Margin on Prescription Sales 23.4% 23.3% 22.1% 26.5% 27.0% 26.5% Gross Margin on All Other Sales 29.5% 31.8% 30.7% 32.7% 30.4% 31.2% Overall Gross Profit Margin 23.8% 24.0% 22.9% 26.7% 27.5% 27.1% Percent of Sales Dispensed Generically 69.0% 72.0% 76.0% 68.3% 72.3% 74.9% We assessed the sales mix and gross profit margins for prescriptions separate from other sales. Prescription sales decreased for all pharmacies and the Top 25 Percent, while other sales increased for the Top 25 Percent. Independent community pharmacies continue to focus mainly on prescriptions for the majority of their sales. Overall gross profit margin for all participating pharmacies decreased by 1.1 percentage points, while gross profit margin for the Top 25 Percent decreased by 0.4 percentage points. In all participating pharmacies, gross margin decreased on both prescription and all other sales. Independent pharmacies are needing to maintain their competitiveness. For the Top 25 Percent, gross margin for prescription sales decreased while gross margin for All Other Sales increased. The Top 25 Percent often find a niche to offer products and services with higher gross margins. Because over 90 percent of sales in an independent community pharmacy are attributed to prescription sales, the overall gross profit margin trend usually follows the prescription sales gross profit margin trend. Operating Expense Management We evaluated two separate components of operating expenses payroll expenses and other operating expenses. Payroll expenses include all wages, employee taxes, and benefits for all staff including owners. Other operating expenses include advertising, insurance, store supplies, containers and labels, delivery expenses, office postage, pharmacy computer expense, rent, utilities and telephone, and all other operating expenses. These are the items frequently referred to as overhead expenses. Payroll expenses, as a percentage of sales, decreased by 1.1 percentage points in 2011 to 13.4 percent. The number of employees also slightly decreased in 2011 from 10.6 to 10.3 employees per location. Payroll expenses decreased due to the flat or decreased wages paid and the decrease in the number of staff employees. To recruit quality employees, independent community pharmacists continued to pay competitive wages and benefits (e.g., life insurance, health insurance) to pharmacists and technicians. Staff cost per employee represents, on average, the amount of compensation, taxes and employee benefits paid during the year to each non-owner employee. Independent community pharmacies paid median staff costs remained relatively the same at $47,152 per employee. Staff costs per employee for the Top 25 Percent increased slightly in 2011. Staff costs per employee for the Top 25 Percent were lower than the costs for all pharmacies at $44,221 (compared to $47,152 for all pharmacies). 10 2012 NCPA Digest Sponsored by Cardinal Health

Payroll Expenses as a Percentage of Sales FIGURE 5 14.5% 14.0% 13.5% 13.0% 12.5% 12.0% 2009 2010 2011 All Pharmacies Top 25 Percent Hourly wages for staff pharmacists and technicians slightly decreased in 2011. Staff pharmacist wages decreased to $52.89 and pharmacy technician wages decreased to $13.62. Clerk/cashier wages increased by 19 cents per hour to $9.93. Pharmacies reported the number of fulltime equivalent (FTE) employees working during the year. Average responses showed staffing levels decreased. This may be due to the decrease in sales and the necessity of controlling employee costs. For purposes of this report, each 2,080 hours of work is considered one FTE (full-time equivalent) employee. Staff Cost per Employee FIGURE 6 $48,000 $47,152 $46,295 $46,000 $45,375 $44,000 $44,221 $43,723 $42,000 $43,022 $40,000 2009 2010 2011 All Pharmacies Top 25 Percent Rent Rent is an important fixed cost for independent community pharmacists. Total rent paid will vary from pharmacy to pharmacy, depending on a number of factors including the location of the pharmacy. For the average independent community pharmacy, it costs $12.19 to dispense a medication, of which 67 cents goes towards paying rent. Typically, the amount paid in rent per square foot is normally higher in more populated areas than in less populated areas. The average rent paid per square foot over an annual basis, are provided in the table blow broken down by the Pharmacy Staff Positions Table 7 2009 2010 2011 Non-Owner Pharmacists 1.6 1.8 1.6 Technicians 3.9 3.8 3.7 Other Positions 4.1 3.9 3.8 Total Non-Owner Employees 9.6 9.5 9.1 Working Owners Pharmacists and Other Positions 1.1 1.1 1.2 Total Workforce 10.7FTE 10.6FTE 10.3FTE Average Rent per Year Table 8 per Square Foot Local Population Under 20,000 $11 People. Local Population From 20,000 to 50,000 People Local Population Over 50,000 People $13 $19 Operating Results 11

Payroll Expenses as a Percentage of Sales FIGURE 7 population of the town or city where the pharmacy is located. The values below are rounded to the nearest dollar. PRODUCTIVITY Optimum productivity is the result of efficiently controlling payroll expenses while maximizing results, or sales (that is, the effectiveness of workers efforts). Total payroll expenses as a percentage of sales is a benchmark for measuring cost efficiency. Sales Per Employee is a benchmark for measuring employee productivity. In 2011, for all participating pharmacies, sales per employee increased to $473,424. As in the past, all pharmacies were more productive than the Top 25 Percent. Sales per employee was greater for all pharmacies compared to the Top 25 Percent. TECHNOLOGY One way independent community pharmacies continue to stay competitive is through the utilization of labor-saving technologies. When used correctly and implemented under the right circumstances, these technologies can help improve the productivity of a pharmacy. In the case of pharmacies with automated dispensing systems (such as an automated counter or an automated dispensing system), they tend to be $475,000 $470,000 $465,000 $460,000 $455,000 $450,000 All Pharmacies more productive as demonstrated through a higher rate of sales per each full time employee. These productivity gains were often captured through slightly higher wages, but because these employee s were more productive these pharmacies were able to maintain their sales volume of prescription drugs with fewer workers. It is important to note that the majority of pharmacies utilizing labor saving technologies had over $3.0 million in revenue. FINANCIAL POSITION Managing Assets and Controlling Debt Managing assets and controlling debt enhances financial position. By efficiently managing assets, the amount of sales and profits generated from the pharmacy s investment in assets increases. The largest and most important asset to the independent community pharmacy Percentage of Pharmacies That Utilize a Given Technology Table 9 by Sales Volume Integrated Voice Response (IVR) Automated Dispensing System (ADS) Prescription Sales Less Than $3.0 Million 2009 2010 2011 Prescription Sales Greater Than $3.0 Million 26% have IVR 58% have IVR 11% have ADS 43% have ADS Point of Sale (POS) System 72% have POS 85% have POS Top 25 Percent is its investment in inventory and is more thoroughly evaluated in the next section Cash Flow. Here we assess the overall asset efficiency considering all assets of pharmacies. Asset Efficiency Ratios For purposes of this study, we measured asset efficiency using the sales to assets ratio. Refer to the Guide to Benchmarking for a review of how this ratio is computed and interpreted. You can download the Guide by visiting www.ncpanet.org. For 2011, the median participant for all pharmacies generated $5.00 in sales for every dollar invested in assets. The Top 25 Percent s sales to assets ratio of $5.43 indicates that they generated slightly more sales for every dollar invested in assets. Asset efficiency for all pharmacies participating in the 2012 NCPA Digest, sponsored by Cardinal Health was similar to 2010. Debt Management Overall, pharmacies had low risk as measured by the debt to worth ratio. The debt to worth ratio for the Top 25 Percent shows that for every dollar owners have invested in their business, the creditors have provided about 41 cents as compared to 40 cents for all pharmacies. 12 2012 NCPA Digest Sponsored by Cardinal Health

Asset Efficiency Ratios Table 10 Median For All Pharmacies Median For Top 25 Percent 2009 2010 2011 2009 2010 2011 Sales to Assets $5.10 $5.20 $5.00 $5.73 $5.64 $5.43 Debt Management Table 11 Ratio Computation Median For All Pharmacies Median For Top 25 Percent 2009 2010 2011 2009 2010 2011 Debt to Worth Return on Investment Total Liabilities Net Worth Net Operating Income Net Worth 0.43 0.41 0.40 0.42 0.42 0.41 21% 19.9% 19.1% 52% 49% 48% This year, the Top 25 Percent were similar in risk compared to all pharmacies. This year, the risk associated with investing in an independent pharmacy appears comparable to last year as measured by the debt to worth ratio. Return on investment (ROI) decreased in 2011 for independent community pharmacies. For every dollar owners invested, they earned 19.1 cents in net operating income, which is lower than 2010. The ROI for the Top 25 Percent also decreased in 2011 from 49 percent to 48 percent. The return on investment ratio for the Top 25 Percent shows that for every dollar the owner has invested in the business, they earned about 48 cents in net operating income after compensation to owners but before tax. This compares to only 19.1 cents for all pharmacies. Although the debt to worth ratio is similar between all pharmacies and the Top 25 Percent, the return on investment is greater in the Top 25 Percent. This is due to their higher net profits. CASH FLOW Managing Working Capital The amount of working capital, or cash flowing through the business, indicates liquidity. The current ratio is a common benchmark for measuring cash flow or liquidity. This ratio shows that the Top 25 Percent have $4.71 in current assets on hand for every $1.00 in current liabilities, and all pharmacies have $3.90 in current assets on hand for every $1.00 in current liabilities. The quick ratio is the other ratio that measures the companies ability to generate cash quickly without selling inventory. The Top 25 Percent had $2.42 in cash and accounts receivable on hand for every $1.00 in current liabilities compared to $1.62 for all pharmacies. Both the current ratio and quick ratio for all pharmacies and the Top 25 percent decreased in 2010. This is an indication that pharmacies may be increasingly focused on cash flow as prescription margins become more narrow. Working capital is a cycle of funds moving through the pharmacy. The primary elements of the working capital cycle 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 managed by assessing the number of days cash is consumed by inventory and accounts receivable or provided by trade account creditors (vendors). Inventory was held in stock for 34 days in 2011, 3 days higher than in 2010. The accounts receivable collection period increased by 1 day to 16 days for all pharmacies. The Top 25 Percent maintained their accounts receivable collection period at 14 days. The Top 25 Percent Cash Flow Table 12 Median For All Pharmacies Median For Top 25 Percent 2009 2010 2011 2009 2010 2011 Cash Flow Is Used For Inventory Turn Days 37 Days 31 Days 34 Days 34 Days 30 Days 31 Days Accounts Receivable Collection Period 16 Days 15 Days 16 Days 14 Days 14 Days 14 Days For a Total of 53 Days 46 Days 50 Days 48 Days 44 Days 45 Days Cash Flow Is Provided by Accounts Payable Payment Days 15 days 14 days 14 days 12 days 11 days 13 days Net Days in Cycle 38 days 32 days 36 days 36 days 33 days 32 days Operating Results 13

continued to pay their bills quicker than the median for all pharmacies. Inventory Control The goal of inventory management is to minimize the investment in inventory as sales rise while ensuring that inventory is available when needed. Benchmarks for assessing inventory are inventory turnover (the number of times inventory is used up during the year), and inventory turn days. Turn days converts the inventory turnover ratio into the average number of days worth of stock on hand. The inventory benchmarks for independent community pharmacies are displayed below. Prescription inventory for all pharmacies turned faster than the overall turnover of all merchandise combined, as would be expected since over-the-counter medicines and other merchandise tend to turn more slowly. Prescription stock stayed on hand for 30 days (compared to 34 days for all inventory). The Top 25 Percent maintained similar turnover rates compared to all pharmacies. Inventory Control Table 13 Median For All Pharmacies Median For Top 25 Percent 2009 2010 2011 2009 2010 2011 Inventory Turnover (Annual) 9.8 11.6 10.7 10.7 12.1 11.7 Inventory Turnover Days 37 days 31 days 34 days 34 days 30 days 31 days Prescription Inventory Turnover (Annual) 11.7 12.4 12.1 10.9 12.8 12.2 Prescription Inventory Turnover Days 31 days 29 days 30 days 33 days 29 days 30 days 14 2012 NCPA Digest Sponsored by Cardinal Health

2011 Common-Sized (Average) Income Statement Percentage of Total Sales Table 14 Sales All Pharmacies 2009 2010 2011 2011 Average ($) Top 25 Percent 2009 2010 2011 2011 Average ($) Prescription Sales 93.3% 92.0% 92.2% $3,532,300 96.3% 93.4% 92.6% $3,244,801 All Other Sales 6.7% 8.0% 7.8% $299,181 3.7% 6.6% 7.4% $259,304 Total Sales 100% 100% 100% $3,831,481 100% 100% 100% $3,504,105 Cost of Goods Sold Prescriptions Costs 72.1% 70.5% 71.9% $2,754,835 70.8% 68.0% 68.7% $2,407,320 All Other Costs 4.7% 5.5% 5.2% $199,237 2.5% 4.5% 4.2% $147,172 Total Cost of Goods Sold 76.2% 76.0% 77.1% $2,954,072 73.3% 72.5% 72.9% 2,554,493 Gross Profit 23.8% 24.0% 22.9% $877,409 26.7% 27.5% 27.1% $949,612 Operating Expenses Payroll Expenses Salaries, Wages 12.3% 12.5% 11.2% $429,126 11.1% 12.4% 11.3% $395,963 Payroll Taxes, Workers Comp, Employee Benefits 1.8% 2.0% 2.2% $84,293 1.4% 1.5% 1.6% $56,066 Total Payroll Expenses 14.1% 14.5% 13.4% $513,419 12.5% 13.9% 12.9% $452,029 Other Operating Expenses Advertising 0.5% 0.5% 0.4% $15,326 0.4% 0.4% 0.4% $14,016 Insurance 0.3% 0.3% 0.4% $15,326 0.4% 0.3% 0.3% $10,512 Store Supplies, Containers, Labels 0.6% 0.6% 0.4% $15,326 0.5% 0.6% 0.4% $14,016 Pharmacy Computer Expense 0.4% 0.4% 0.5% $19,157 0.3% 0.4% 0.4% $14,016 Rent 1.2% 1.2% 1.3% $49,809 0.8% 0.9% 1.0% $35,041 Utilities, Telephone 0.4% 0.4% 0.4% $15,326 0.3% 0.4% 0.4% $14,016 All Other Operating Expenses 3% 3.1% 3.2% $122,607 2% 2.3% 2.8% $98,115 Total Other Operating Expenses 6.4% 6.5% 6.6% $252,888 4.7% 5.3% 5.7% $199,734 Total Operating Expenses 20.5% 21.0% 20.0% $766,296 17.2% 19.2% 18.6% $651,763 Net Operating Income 3.3% 3.0% 2.9% $111,123 9.5% 8.3% 8.5% $297,849 Operating Results 15

2011 Median Financial Benchmarks Table 15 Profitability Ratios Net Operating Income Percentage Net Operating Income Dollars Before Tax Productivity Ratios Sales per Employee Staff Costs per Employee Prescription Sales Per Square Foot All Other Sales per Square Foot Total Sales per Square Foot Net Profit Before Tax Sales All Pharmacies Top 25 Percent 2009 2010 2011 2009 2010 2011 2.7% 2.9% 2.7% 7.5% 6.3% 6.5% Net Profit Before Tax $94,640 $92,340 $91,110 $187,521 $182,353 $192,450 Sales # of Employees Incl. Owners Non-Owner Wage, Tax, Benefits # of Employees Excluding Owners Prescription Sales Prescription Dept. Square Feet All Other Sales Square Feet Excluding Prescription Dept. Total Sales Square Feet $469,205 $467,375 $473,424 $453,876 $451,686 $458,763 $45,357 $46,295 $47,152 $43,022 $43,723 $44,221 $3,346 $3,310 $3,266 $3,420 $3,390 $3,314 $80 $138 $136 $75 $149 $143 $1,227 $1,168 $1,151 $1,360 $1,273 $1,207 Median Sales Group Middle Point $3,383,667 $3,173,301 $3,374,444 $2,982,649 $2,910,532 $2,960,800 Financial Position Ratios Sales to Assets Return on Investment Debt to Worth Cash Flow Ratios Current Ratio Quick Ratio Inventory Turnover (Annual) Inventory Turnover (Days) Prescription Inventory Turnover Prescription Inventory Turnover (Days) Accounts Receivable Turnover (Annual) Accounts Receivable Collection (Days) Accounts Payable Turnover (Annual) Accounts Payable Turnover (Days) Sales Total Assets Net Operating Income Dollars Net Worth Total Liabilities Net Worth Current Assets Current Liabilities Cash + Accounts Receivable Current Liabilities Cost of Goods Sold Inventory 365 Inventory Turnover Prescription Cost of Goods Sold Prescription Inventory 365 Prescription Inventory Turnover Credit Sales Accounts Receivable 365 Accts Receivable Turnover Cost of Goods Sold Accounts Payable 365 Accounts Payable Turnover 5.10 5.20 5.00 5.73 5.64 5.43 21% 19.9% 19.1% 52% 49% 48% 0.43 0.41 0.40 0.42 0.42 0.41 3.73 4.1 3.9 4.36 4.78 4.71 1.59 1.71 1.62 2.05 2.51 2.42 9.8 11.6 10.7 10.7 12.1 11.7 37 Days 31 Days 34 Days 34 Days 30 Days 31 Days 11.7 12.4 12.1 10.9 12.8 12.2 31 Days 29 Days 30 Days 33 Days 29 Days 30 Days 22.3 24.5 23.1 25.4 26.3 25.7 16 Days 15 Days 16 Days 17 Days 14 Days 14 Days 23.8 26.73 25.2 36.6 29.6 28.3 15 Days 14 Days 14 Days 10 Days 12 Days 13 Days 16 2012 NCPA Digest Sponsored by Cardinal Health

2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets Table 16 All Pharmacies Top 25 Percent 2009 2010 2011 2009 2010 2011 Assets Current Assets Cash and Cash Equivalents 13.2% 16.5% 16.1% 18.9% 23.7% 22.9% Accounts Receivable 22.3% 21.4% 21.7% 17.6% 19.9% 19.1% Inventory 36.3% 32.8% 31.9% 33.2% 31.3% 31.7% Other Current Assets 7.8% 11.7% 11.3% 12.4% 12.4% 11.9% Total Current Assets 79.6% 82.3% 81.0% 82.1% 87.3% 85.6% Net Fixed Assets 15.8% 12.6% 13.4% 11.0% 8.9% 9.9% Other Assets 4.6% 5.1% 5.6% 6.9% 3.8% 4.5% Total Assets 100% 100% 100% 100% 100% 100% Liabilities and Owners Equity Current Liabilities Notes Payable (Within One Year) 5.3% 5.2% 5.6% 5.8% 3.3% 3.9% Accounts Payable 17.4% 14.3% 14.7% 11.3% 8.8% 9.3% Other Current Liabilities 6.3% 6.0% 6.4% 4.5% 3.9% 4.0% Total Current Liabilities 29.0% 25.5% 26.7% 21.6% 16.0% 17.2% Long Term Liabilities Notes Payable to Owner(s) 5.9% 9.7% 8.9% 8.1% 7.1% 7.6% Other Long Term Liabilities 19.4% 16.6% 17.1% 10.4% 14.3% 13.9% Total Long Term Liabilities 25.3% 26.3% 26.0% 18.5% 21.4% 21.5% Total Liabilities 54.3% 51.8% 52.7% 40.1% 37.4% 38.7% Total Owners Equity 45.7% 48.2% 47.3% 59.9% 62.6% 61.3% Total Liabilities and Owners Equity 100% 100% 100% 100% 100% 100% Operating Results 17

Sales Volume Summary Sales indicate the size of the pharmacy and can influence financial performance. To determine how a pharmacy s ratios change as sales increase, we sorted the pharmacies into four separate groups based on their annual sales. + Less than $2.5 million + $2.5 million to $3.5 million + $3.5 million to $6.5 million + More than $6.5 million The three basic statements (commonsized [average] income statement, median financial benchmarks, and common-sized balance sheet) for these sales categories appear in Tables 19, 20, and 21. This information shows some significant trends. Our observations follow. PRODUCTIVITY Sales per Employee Pharmacies with sales over $6.5 million had the highest productivity, followed by pharmacies between $3.5 and $6.5 million in sales. This high employee productivity is a significant driver of the industry s profitability. Pharmacies Have Higher Staff Cost per Employee as Sales Grow Median staff costs per employee for pharmacies with sales between $3.5 million and $6.5 million and sales over $6.5 million were the highest of all the sales categories. This is likely due to the additional management and administrative staff required to operate larger pharmacies. Sales per Employee by Sales Revenue FIGURE 8 Under $2.5 M $309,346 $2.5 M to $3.5 M $418,193 $3.5 M to $6.5 M $479,529 Over $6.5 M $502,632 $0 $100K $200K $300K $400K $500K Staff Cost per Employee by Sales Revenue FIGURE 9 Under $2.5 M $40,023 $2.5 M to $3.5 M $44,193 $3.5 M to $6.5 M $52,645 Over $6.5 M $55,819 $25K $30K $35K $40K $45K $50K PROFITABILITY The table below shows sales mix and gross margins for pharmacies in the four sales categories. Sales mix between prescription sales and other sales varied among the sales groups; however, all pharmacies had greater than 90 percent in prescription sales. Sales mix between $55K prescription sales and other sales varied among the sales groups; however, all pharmacies had greater than 90 percent in prescription sales. The highest average gross margins were earned by pharmacies with sales between $3.5 to $6.5 million in sales and over $6.5 million in sales. These pharmacies 18 2012 NCPA Digest Sponsored by Cardinal Health

had gross margin percentages greater than 23 percent. Because the volume is higher in stores with sales over $6.5 million in sales, the net operating income dollars to the pharmacy are significantly higher compared to other pharmacies. These larger pharmacies gain efficiencies with respect to cost of goods sold and expenses. Inventory Control Inventory turns increased as sales increased, with thepharmacies with sales over $6.5 million being the most efficient at inventory control. Pharmacies with sales over $6.5 million turned their inventory the fastest, with stock staying on hand for only 31 days. Smaller pharmacies (having sales under $2.5 million) held stock over 29 percent longer for a total of 40 days. Efficient management of inventory had a significant impact on the trend of increasing overall inventory turnover as sales increased. Expense Management The charts show how payroll expenses and other operating expenses change as sales increase. In 2010, the payroll expense (including owners) as a percentage of sales was highest in pharmacies with sales less than $2.5 million in sales. This increase in payroll expense for this group of pharmacies resulted in less net operating income. In general, other operating expenses (overhead) ranged from 6.2 percent to 6.7 percent in the various sales categories, with the lowest sales category having the highest operating expenses as a percent of sales. This observation is not surprising given the effect of fixed expenses. Fixed expenses do not grow in relation to sales. Instead, they stay the same as Profitability Table 17 Payroll Expenses FIGURE 10 Under $2.5 M 14.1% $2.5 M to $3.5 M 13.6% $3.5 M to $6.5 M 13.1% Over $6.5 M 13.0% 10% 11% 12% Other Operating Expenses FIGURE 11 13% Under $2.5 M 6.4% $2.5 M to $3.5 M 6.2% 14% $3.5 M to $6.5 M 6.7% Over $6.5 M 6.3% 0.0% 2.5% Under $2.5M 5.0% $2.5M to $3.5M 7.5% $3.5M to $6.5M 15% 10.0% Over $6.5M Prescription Sales 93% 92.4% 91.6% 91.3% All Other Sales 7% 7.6% 8.4% 8.7% Total Sales 100% 100% 100% 100% Average Cost of Goods Sold 77.4% 78.3% 76.3% 76.1% Average Gross Margin 22.6% 21.7% 23.7% 23.9% Inventory Control Table 18 Under $2.5M $2.5M to $3.5M $3.5M to $6.5M Over $6.5M Inventory Turnover (Annual) 9.1 10.2 11.4 11.9 Inventory Turnover (Days) 40 days 36 days 32 days 31 days Rx Inventory Turnover (Annual) 10.3 11.2 12.1 12.9 Rx Inventory Turnover (Days) 35 days 33 days 30 days 28 days Sales Volume Summary 19

Average Net Operating Income by Sales Volume FIGURE 12 Under $2.5 M 2.4% sales increase and over the long-term will stair-step up. As sales grow and costs stay the same, costs as a percentage of sales decrease. Again we find that as sales grow, companies may become less efficient as they step up their costs to support the larger pharmacies. $2.5 M to $3.5 M 2.2% $3.5 M to $6.5 M 2.7% Over $6.5 M 2.9% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Net Operating Income Before Tax The group of pharmacies with sales between $2.5 million and $3.5 million showed the lowest net operating income as a percentage of sales. For pharmacies with sales between $3.5 and $6.5 million and those pharmacies with sales over $6.5 million, profits before taxes were higher due to high gross profit percentage and lower payroll expenses, as a percentage of sales. 2011 Common-Sized (Average) Income Statement Percentage of Total Sales by Sales Category Table 19 Under $2.5M $2.5M to $3.5M $3.5M to $6.5M Over $6.5M Sales Prescription Sales 93.0% 92.4% 91.6% 91.3% All Other Sales 7.0% 7.6% 8.4% 8.7% Total Sales 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold Prescriptions Costs 72.0% 72.7% 71.4% 70.8% All Other Costs 5.4% 5.6% 4.9% 5.3% Total Cost of Goods Sold 77.4% 78.3% 76.3% 76.1% Gross Profit 22.6% 21.7% 23.7% 23.9% Operating Expenses Payroll Expenses Salaries, Wages 11.8% 11.4% 11.0% 10.9% Payroll Taxes, Workers Comp, Employee Benefits 2.3% 2.2% 2.1% 2.1% Total Payroll Expenses 14.1% 13.6% 13.1% 13.0% Other Operating Expenses Advertising 0.3% 0.3% 0.5% 0.5% Insurance 0.4% 0.4% 0.4% 0.4% Store Supplies, Containers, Labels 0.5% 0.4% 0.5% 0.4% Pharmacy Computer Expense 0.5% 0.5% 0.5% 0.4% Rent 1.4% 1.3% 1.2% 1.2% Utilities, Telephone 0.4% 0.4% 0.4% 0.4% All Other Operating Expenses 2.9% 2.9% 3.3% 3.0% Total Other Operating Expenses 6.4% 6.2% 6.7% 6.3% Total Operating Expenses 20.5% 19.8% 19.8% 19.3% Net Operating Income 2.1% 1.9% 3.9% 4.6% 20 2012 NCPA Digest Sponsored by Cardinal Health

2011 Median Financial Benchmarks by Sales Category Table 20 Profitability Ratios Under $2.5M $2.5M to $3.5M $3.5M to $6.5M Over $6.5M Net Operating Income Percentage 2.4% 2.2% 2.7% 2.9% Net Operating Income Dollars Before Tax $41,200.00 $60,349.00 $83,478.00 $246,071.00 Productivity Ratios Sales per Employee $309,346 $418,193 $479,529 $502,632 Staff Costs per Employee $40,023 $44,193 $52,645 $55,819 Prescription Sales per Square Foot $2,015 $2,893 $3,962 $4,753 All Other Sales per Square Foot $73 $101 $121 $132 Total Sales per Square Foot $702 $1,098 $1,184 $1,487 Median Sales $1,716,666.67 $2,743,136.36 $3,091,777.78 $8,485,206.90 Financial Position Ratios Sales to Assets 4.68 5.32 4.88 5.46 Return on Investment 18.1% 16.2% 24.9% 24.1% Debt to Worth 0.33 0.34 0.42 0.45 Cash Flow Ratios Current Ratio 3.7 4.1 4.2 3.9 Quick Ratio 1.7 1.8 1.7 1.6 Inventory Turnover (Annual) 9.1 10.2 11.4 11.9 Inventory Turnover (Days) 40 Days 36 Days 32 Days 31 Days Prescription Inventory Turnover (Annual) 10.3 11.2 12.1 12.9 Prescription Inventory Turnover (Days) 35 Days 33 Days 30 Days 28 Days Accounts Receivable Turnover (Annual) 23.9 24 22.8 21.4 Accounts Receivable Collection (Days) 15 Days 15 Days 16 Days 17 Days Accounts Payable Turnover (Annual) 25.7 29.2 24.6 24.3 Accounts Payable Turnover (Days) 14 Days 13 Days 15 Days 15 Days Sales Volume Summary 21

2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets by Sales Category Table 21 Assets Under $2.5M $2.5M to $3.5M $3.5M to $6.5M Over $6.5M Current Assets Cash and Cash Equivalents 17.9% 16.1% 15.9% 18.2% Accounts Receivable 19.4% 20.7% 21.9% 21.7% Inventory 34.3% 33.1% 31.2% 30.7% Other Current Assets 11.7% 11.0% 11.4% 11.1% Total Current Assets 83.3% 80.9% 80.4% 81.7% Net Fixed Assets 11.2% 12.1% 13.7% 13.6% Other Assets 5.5% 7.0% 5.9% 4.7% Total Assets 100.0% 100.0% 100.0% 100.0% Liabilities and Owners Equity Current Liabilities Notes Payable (Within One Year) 5.9% 5.7% 5.3% 5.2% Accounts Payable 13.5% 14.7% 14.8% 13.6% Other Current Liabilities 6.3% 6.6% 6.8% 5.8% Total Current Liabilities 25.7% 27.0% 26.9% 24.6% Long Term Liabilities Notes Payable to Owner(S) 11.3% 9.8% 8.5% 8.6% Other Long Term Liabilities 16.8% 17.2% 17.4% 16.6% Total Long Term Liabilities 28.1% 27.0% 25.9% 25.2% Total Liabilities 53.8% 54.0% 52.8% 49.8% Total Owners Equity 46.2% 46.0% 47.2% 50.2% Total Liabilities and Owners Equity 100.0% 100.0% 100.0% 100.0% 22 2012 NCPA Digest Sponsored by Cardinal Health

Cost of Dispensing One definition of profit is the monetary difference between what it costs to produce and sell a product and the revenue from its sale. In the pharmacy, knowing your cost of dispensing is an indispensable tool in maintaining or improving cash flow and profitability. To determine the cost of dispensing, the pharmacy owner or manager needs to conduct a departmental cost analysis that assigns direct costs and allocates indirect costs to the prescription department. The total cost allocated to the prescription department divided by the number of prescriptions dispensed is the average cost of dispensing. This average cost of dispensing is the average amount that it costs the pharmacy to dispense a prescription. Cost of Dispensing Formula Cost of dispensing = Total annual costs allocated to prescription department Total annual number of prescriptions dispensed Cost of dispensing includes all direct costs (e.g., prescription bottles and labels, delivery service, and pharmacy computer expense) related to operating a prescription department and a share of the indirect costs. The share of indirect costs (e.g., rent, salaries, and advertising) is estimated by allocating a portion of the cost to the prescription department. There are multiple methods that can be used to allocate costs. Although there is no universally accepted method for allocating indirect costs, the basis of allocation should seem logical. In pharmacy, the following methods have been used to allocate indirect expenses: + A percentage of prescription sales to total sales + A percentage of prescription department square feet to total square feet + A percentage of prescription department inventory to total inventory + A percentage of time the asset is used for the prescription department activities to total time used Pharmacy owners and managers can select one method to use or they can use multiple methods to allocate indirect expenses. Having classified all costs that are associated with the prescription department, the cost of dispensing can be estimated. As previously stated, the cost to dispense a prescription is found by dividing the total cost of operating the prescription department by the total number of prescriptions dispensed. 2012 NCPA Digest, sponsored by Cardinal Health Analyses We used the Digest data to calculate the cost of dispensing for 2011. It is important to note that this calculation only covers the cost of dispensing and does not include a profit. The 2012 Digest pharmacy s cost of dispensing for all pharmacies is $12.19, down from $12.44 last year. Expenses decreased as FTEs decreased, hourly wages slightly decreased, and operating expenses were reduced. We also calculated the cost of dispensing in various geographic regions, as shown in Figure 2. The Northeast region has the highest cost of dispensing at $15.03, and the East-Central region has the lowest at Cost of Dispensing by Geographical Region TABLE 22 Cost of Dispensing by Region West West-Central East-Central Northeast Southeast 2011 $12.39 $12.41 $11.09 $15.03 $11.12 Cost of Dispensing 23

$11.09. Cost of dispensing remained relatively the same as last year in all regions, just slightly decreasing by a few cents. If a pharmacy is to make a profit, the reimbursement rate or the price charged must cover the product cost, the cost of dispensing, plus a surplus for profit. Thus, for pharmacy owners and managers to make sound business decisions on whether to accept a contract or not, they need to know what it costs them to dispense a prescription. It is suggested that pharmacy owners estimate their own cost of dispensing and then carefully evaluate each third-party contract before signing. Additionally, all usual and customary charges should include the cost of dispensing, and pharmacy benefit managers should reimburse to cover cost of dispensing. West West-Central East-Central Northeast Southeast 24 2012 NCPA Digest Sponsored by Cardinal Health

Third-Party Prescriptions The most significant external pressure on the business of independent community pharmacy is third-party prescription coverage and the plans that administer drug coverage, pharmacy benefit managers (PBMs). For community pharmacies, public and private third-party payers dictate prescription drug reimbursement payments and introduce additional operational and financial challenges to the pharmacy. For most community pharmacies, achieving a functional and fair working relationship with third- party payers is essential to attain long-term profitability and overall business survival. According to Figure 13, third-party activity increased to 87 percent of the total prescription volume for the average Digest pharmacy. It also shows that Medicare Part D pays for 32 percent of Summary of Third-Party Prescription Activity, 5-Year Trend 2011 2010 the prescriptions filled in independent community pharmacies. The percent covered by Medicaid increased slightly to 17 percent. However, with nearly half of the prescriptions filled by independents being paid for by a government program, the reimbursement strategies of government programs significantly affect the financial viability of independent community pharmacy. Prescriptions paid for by other third-parties decreased to 38 percent. Results for pharmacies that reported low (less than 80 percent), average (80-90 percent) and high (more than 90 percent) third-party prescription volume as a percentage of total prescriptions filled are contrasted in Tables 23, 24 and 25 on the pages that follow. FIGURE 13 Pharmacies with high third-party activity had higher median sales at $3,704,773 compared to $2,900,000 for companies with less than 80 percent of total prescriptions filled under third-party contract arrangements. These additional sales were at lower gross profit margins (23.2 percent compared to 24.8 percent for pharmacies with less than 80 percent third-party). It appears that pharmacies whose prescription volume is between 80 and 90 percent are more profitable. This may be due to their willingness to reject third-party contracts that do not reimburse the pharmacists adequately based on their cost of dispensing. 2009 2008 2007 0% 20% 40% 60% 80% 100% Medicaid Medicare Part D Other Third-Party Non Third-Party Third-Party Prescriptions 25

2011 Common-Sized (Average) Income Statement Percentage Table 23 of Total Sales by Third-Party Prescription Activity Sales 80% or Less Third-Party 80% to 90% Third-Party More Than 90% Third-Party Prescription Sales 91.6% 94.0% 93.2% All Other Sales 8.4% 6.0% 6.8% Total Sales 100.0% 100.0% 100.0% Cost of Goods Sold Prescriptions Costs 70.1% 70.2% 72.4% All Other Costs 5.1% 5.2% 4.4% Total Cost of Goods Sold 75.2% 75.4% 76.8% Gross Profit 24.8% 24.6% 23.2% Operating Expenses Payroll Expenses Salaries, Wages 12.1% 11.8% 12.7% Payroll Taxes, Workers Comp, Employee Benefits 1.7% 1.7% 2.0% Payroll Expenses 13.8% 13.5% 14.7% Other Operating Expenses Advertising 0.6% 0.5% 0.5% Insurance 0.5% 0.4% 0.2% Store Supplies, Containers, Labels 0.6% 0.5% 0.5% Office Postage 0.1% 0.1% 0.1% Delivery Service 0.4% 0.2% 0.3% Pharmacy Computer Expense 0.4% 0.4% 0.4% Rent 1.2% 1.0% 1.3% Utilities, Telephone 0.4% 0.4% 0.4% All Other Operating Expenses 4.5% 2.7% 2.4% Total Other Operating Expenses 8.7% 6.2% 6.1% Total Expenses 22.5% 19.7% 20.8% Net Operating Income 2.3% 4.9% 2.4% 26 2012 NCPA Digest Sponsored by Cardinal Health

2011 Median Financial Benchmarks by Third-Party Prescription Activity Table 24 Profitability Ratios Less than 80% Third-Party 80% to 90% Third-Party 90% or more Third-Party Net Operating Income Percentage 1.63% 3.45% 1.89% Net Operating Income Dollars Before Tax $46,435 $115,997 $60,051 Productivity Ratios Sales per Employee $339, 172 $407,096 $424,910 Staff Costs per Employee $40,391 $44,178 $48,544 Prescription Sales per Square Foot $3,025 $3,243 $3,779 Other Sales per Square Foot $56 $84 $78 Total Sales per Square Foot $1,006 $1,184 $1,324 Median Sales $2,900,000 $3,430,230 $3,704,773 Financial Position Ratios Sales to Assets $4.91 $4.94 $5.12 Return on Investment 16% 22% 18% Debt to Worth.45.46.52 Cash Flow Ratios Current Ratio 4.15 3.79 2.53 Quick Ratio 1.67 1.73 1.16 Inventory Turnover (Annual) 9.6 10.4 10.25 Inventory Turnover (Days) 38 Days 35 Days 36 Days Prescription Inventory Turnover (Annual) 10.6 10.8 11.6 Accounts Receivable Turnover (Annual) 20.3 25.7 18.6 Accounts Receivable Collection (Days) 18 Days 14 Days 20 Days Accounts Payable Turnover (Annual) 26.8 22.2 22.3 Accounts Payable Turnover (Days) 14 Days 16 Days 16 Days Third-Party Prescriptions 27

2011 Common-Sized (Average) Balance Sheet Percentage Table 25 of Total Assets by Third-Party Prescription Activity Assets Less Than 80% Third-Party 80% to 90% Third-Party 90% or More Third-Party Current Assets Cash and Cash Equivalents 11.3% 19.9% 8.4% Accounts Receivable 23.2% 18.7% 24.4% Inventory 35.6% 33.9% 38.7% Other Current Assets 6.8% 12.4% 5.2% Total Current Assets 76.9% 84.9% 76.7% Net Fixed Assets 13.7% 10.4% 20.5% Other Assets 9.4% 4.7% 2.8% Total Assets 100% 100% 100% Liabilities and Owners Equity Current Liabilities Notes Payable (Within One Year) 7.7% 5.3% 5.1% Accounts Payable 13.9% 14.1% 21.1% Other Current Liabilities 4.4% 4.5% 8.4% Total Current Liabilities 26.0% 23.9% 34.6% Long Term Liabilities Notes Payable to Owner(s) 7.6% 7.4% 4.7% Other Long Term Liabilities 18.2% 12.3% 25.0% Total Long Term Liabilities 25.8% 19.7% 29.7% Total Liabilities 51.8% 43.6% 64.3% Total Owners Equity 48.2% 56.4% 35.7% Total Liabilities and Owners Equity 100% 100% 100% 28 2012 NCPA Digest Sponsored by Cardinal Health

Geographic Summary Conditions of the geographic region can influence operations of an independent community pharmacy, particularly in today s economy. To determine how pharmacies results differ by geographic region, we sorted the pharmacies into five regions. The three basic statements (common-sized income statement, median financial benchmarks, and commonsized balance sheet) for these geographical regions are contained in Tables 26, 27, and 28. + West (AK, AZ, CA, HI, ID, NV, NM, OR, UT, WA) + West-Central (AR, CO, IA, KS, MN, MO, MT, NE, ND, OK, SD, TX, WI, WY) + East-Central (IL, IN, MI, OH, PA, WV) + Northeast (CT, DE, DC, ME, MD, MA, NH, NJ, NY, RI, VT, VA) + Southeast (AL, FL, GA, KY, LA, MS, NC, SC, TN) Median net operating income ranged by region from a high of 3.1 percent (in the West region) to a low of 2.3 percent (in East-Central). This is similar to last year. The East-Central region had the highest median sales of any region at approximately $3.6 million. Geographic Summary 29

2011 Common-Sized (Average) Income Statement Percentage of Total Sales by Geographic Region Table 26 Sales West West- Central East- Central Northeast Southeast Prescription Sales 93.1% 91.5% 91.4% 91.5% 93.6% All Other Sales 6.9% 8.5% 8.6% 8.5% 6.4% Total Sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold Prescriptions Costs 69.9% 71.2% 71.4% 71.5% 73.7% All Other Costs 5.5% 5.3% 5.6% 6.6% 5.2% Total Cost of Goods Sold 75.4% 76.5% 77.0% 78.1% 78.9% Gross Profit 24.6% 23.5% 23.0% 21.9% 21.1% Operating Expenses Payroll Expenses Salaries, Wages 12.1% 11.8% 11.1% 11.4% 11.2% Payroll Tax, Workers Comp, Employee Benefits 2.0% 2.1% 2.3% 1.9% 1.8% Payroll Expenses 14.1% 13.9% 13.4% 13.3% 13.0% Other Operating Expenses Advertising 0.5% 0.5% 0.4% 0.5% 0.4% Insurance 0.4% 0.3% 0.4% 0.3% 0.3% Store Supplies, Containers, Labels 0.6% 0.6% 0.5% 0.6% 0.5% Pharmacy Computer Expense 0.5% 0.4% 0.5% 0.4% 0.4% Rent 1.4% 1.3% 1.2% 1.3% 1.2% Utilities, Telephone 0.5% 0.4% 0.4% 0.4% 0.4% All Other Operating Expenses 3.1% 3.3% 3.1% 2.8% 2.8% Total Other Operating Expenses 7.0% 6.8% 6.5% 6.3% 6.0% Total Operating Expenses 21.1% 20.7% 19.9% 19.6% 19.0% Net Operating Income 3.5% 2.8% 3.1% 2.3% 2.1% 30 2012 NCPA Digest Sponsored by Cardinal Health

2011 Median Financial Benchmarks by Geographic Region Table 27 Profitability Ratios West West- Central East- Central Northeast Southeast Net Operating Income Percentage 3.1% 2.6% 2.3% 2.7% 2.8% Net Operating Income Dollars Before Tax $97,314 $93,410 $82,672 $95,104 $92,895 Productivity Ratios Sales per Employee $444,966 $481,063 $484,583 $482,158 $456,083 Staff Costs per Employee $53,931 $57,002 $36,351 $54,595 $38,687 Prescription Sales per Square Foot $3,063 $3,895 $3,696 $3,420 $3,105 Other Sales per Square Foot $150 $99 $128 $149 $106 Total Sales per Square Foot $1,320 $549 $953 $1,495 $1,132 Median Sales $3,139,161 $3,592,692 $3,594,435 $3,522,370 $3,317,679 Financial Position Ratios Sales to Assets $4.90 $4.76 $4.26 $5.42 $5.31 Return on Investment 21.5% 22.8% 18.7% 18.1% 17.9% Debt to Worth 0.32 0.53 0.58 0.46 0.35 Cash Flow Ratios Current Ratio 4.3 3.21 3.18 3.96 3.91 Quick Ratio 2.1 1.35 1.73 1.42 1.59 Inventory Turnover (Annual) 11.1 8.4 10.9 11.2 11.3 Inventory Turnover (Days) 33 Days 43 Days 33 Days 33 Days 32 Days Prescription Inventory Turnover (Annual) 12.3 11.8 12.4 12.0 11.7 Accounts Receivable Turnover (Annual) Accounts Receivable Collection (Days) 30 31 29 30 31 23.4 Days 23.1 Days 20.7 Days 20.2 Days 24.9 Days Accounts Payable Turnover (Annual) 16 16 18 18 15 Accounts Payable Turnover (Days) 26.1 Days 21.7 Days 21.2 Days 25.8 Days 27.3 Days Accounts payable days 14 17 17 14 13 Geographic Summary 31

2011 Common-Sized (Average) Balance Sheet Percentage of Total Assets by Geographic Region Table 28 Assets West West- Central East- Central Northeast Southeast Current Assets Cash and Cash Equivalents 18.2% 15.2% 16.1% 15.9% 17.0% Accounts Receivable 18.7% 20.1% 22.2% 23.2% 20.6% Inventory 32.4% 31.9% 31.8% 31.3% 31.2% Other Current Assets 11.9% 11.2% 11.3% 11.2% 11.6% Total Current Assets 81.2% 78.4% 81.4% 81.6% 80.4% Net Fixed Assets 14.1% 15.7% 12.0% 13.8% 11.0% Other Assets 4.7% 5.9% 6.6% 4.6% 8.6% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% Liabiities and Owners Equity Current Liabilities Notes Payable (Within One Year) 6.0% 5.2% 5.6% 4.9% 5.3% Accounts Payable 13.9% 15.1% 15.0% 15.2% 14.5% Other Current Liabilities 5.8% 6.9% 6.1% 6.4% 6.0% Total Current Liabilities 25.7% 27.2% 26.7% 26.5% 25.8% Long Term Liabilities Notes Payable to Owner(S) 8.5% 8.6% 8.8% 9.7% 9.4% Other Long Term Liabilities 16.4% 17.7% 17.3% 16.5% 16.9% Total Long Term Liabilities 24.9% 26.3% 26.1% 26.2% 26.3% Total Liabilities 51.2% 53.9% 53.2% 53.4% 52.1% Total Owners Equity 48.8% 46.1% 46.8% 46.6% 47.9% Total Liabilities and Owners Equity 100.0% 100.0% 100.0% 100.0% 100.0% 32 2012 NCPA Digest Sponsored by Cardinal Health

Pharmacy Location Rural versus Metropolitan Locations Pharmacies defined their market type based upon the population of their region. The categories were: + Population Less Than 20,000 + Population From 20,000 to 50,000 + Population More Than 50,000 Over 50 percent of independent community pharmacies are located in an area with a population of less than 20,000. Financial statements comparing pharmacies in these categories are provided in Tables 29, 30, and 31. The common-sized income statement shows that the pharmacies in areas with less than 20,000 people experienced higher payroll expenses as a percentage of sales. This may be due to the pharmacist shortage, and pharmacies having to pay more to attract a pharmacist to rural areas. However, the sales per employee, an indication of productivity, was the highest in the pharmacies located in areas of less than 20,000 people. Pharmacies in areas with more than 50,000 people were able to have higher gross margins and lower payroll expenses, resulting in higher net profits before taxes. Median sales for pharmacies were between $3.1 and $3.9 million, regardless of the population size. Pharmacies in rural areas had slightly higher sales compared to those in metropolitan areas. Yet, the median net operating income percentage was lowest in the rural areas, and thus these pharmacies had the lowest net operating income dollars before tax. Pharmacy Location Rural versus Metropolitan Locations 33

2011 Common-Sized (Average) Income Statement Percentage Table 29 of Total Sales Metropolitan vs. Rural Sales Population Less Than 20,000 Population Of 20,000 to 50,000 Population More Than 50,000 Prescription Sales 92.3% 93.2% 91.1% All Other Sales 7.9% 7.2% 9.3% Total Sales 100.0% 100.0% 100.0% Cost of Goods Sold Prescriptions Costs 71.7% 73.4% 70.8% All Other Costs 5.7% 4.8% 5.9% Total Cost of Goods Sold 77.4% 78.2% 76.7% Gross Profit 22.8% 22.2% 23.7% Operating Expenses Payroll Expenses Salaries, Wages 11.9% 11.3% 11.1% Payroll Taxes, Workers Comp, Employee Benefits 2.3% 2.1% 2.1% Payroll Expenses 14.2% 13.4% 13.2% Other Operating Expenses Advertising 0.5% 0.5% 0.5% Insurance 0.3% 0.3% 0.3% Store Supplies, Containers, Labels 0.6% 0.5% 0.5% Pharmacy Computer Expense 0.5% 0.6% 0.5% Rent 1.3% 1.2% 1.3% Utilities, Telephone 0.4% 0.4% 0.4% All Other Operating Expenses 3.0% 2.9% 3.3% Total Other Operating Expenses 6.6% 6.4% 6.8% Total Expenses 20.8% 19.8% 20.0% Net Operating Income 2.0% 2.4% 3.7% 34 2012 NCPA Digest Sponsored by Cardinal Health

2011 Median Financial Benchmarks Metropolitan vs. Rural Table 30 Profitability Ratios Population Less Than 20,000 Population Of 20,000 To 50,000 Population More Than 50,000 Net Operating Income Percentage 2.3% 2.6% 3.1% Net Operating Income Dollars Before Tax $87,832 $86,514 $98,251 Productivity Ratios Sales per Employee $471,621 $455,207 $464,316 Staff Costs per Employee $47,452 $45,921 $46,800 Prescription Sales per Square Foot $3,641 $3,127 $3,280 All Other Sales per Square Foot $103 $128 $148 Total Sales per Square Foot $995 $1,050 $1,298 Median Sales $3,818,783 $3,327,462 $3,169,387 Financial Position Ratios Sales to Assets $4.60 $5.09 $5.25 Return on Investment 18.8% 19.3% 19.5% Debt to Worth 0.4 0.37 0.42 Cash Flow Ratios Current Ratio 3.54 3.90 4.10 Quick Ratio 1.51 1.61 1.67 Inventory Turnover (Annual) 10.2 10.8 11.1 Inventory Turnover (Days) 36 Days 34 Days 33 Days Prescription Inventory Turnover (Annual) 12.0 11.7 12.5 Prescription Inventory Turnover (Days) 30 Days 31 Days 29 Days Accounts Receivable Turnover (Annual) 21.2 23.6 24.3 Accounts Receivable Collection (Days) 17 Days 15 Days 15 Days Accounts Payable Turnover (Annual) 23.2 26.1 26.7 Accounts Payable Turnover (Days) 16 Days 14 Days 14 Days Pharmacy Location Rural versus Metropolitan Locations 35

2011 Common-Sized (Average) Balance Sheet Percentage Table 31 of Total Assets Metropolitan vs. Rural Assets Population Less Than 20,000 Population of 20,000 to 50,000 Population More Than 50,000 Current Assets Cash and Cash Equivalents 17.1% 16.4% 14.7% Accounts Receivable 20.2% 21.4% 23.7% Inventory 32.9% 32.6% 30.5% Other Current Assets 11.2% 10.3% 12.4% Total Current Assets 81.4% 80.7% 81.3% Net Fixed Assets 13.9% 12.1% 13.3% Other Assets 4.7% 7.2% 5.4% Total Assets 100.0% 100.0% 100.0% Liabilities And Owners Equity Current Liabilities Notes Payable (Within One Year) 5.2% 6.1% 5.8% Accounts Payable 14.4% 15.2% 14.9% Other Current Liabilities 6.5% 6.3% 6.4% Total Current Liabilities 26.1% 27.6% 27.1% Long Term Liabilities Notes Payable to Owner(S) 8.4% 9.1% 9.5% Other Long Term Liabilities 18.6% 14.9% 17.2% Total Long Term Liabilities 27.0% 24.0% 26.7% Total Liabilities 52.9% 51.5% 52.2% Total Owners Equity 47.1% 48.5% 47.8% Total Liabilities and Owners Equity 100.0% 100.0% 100.0% 36 2012 NCPA Digest Sponsored by Cardinal Health

Overview of Financial Statements and Performance Measures Financial Statements The information gathered in the survey is summarized and presented in three basic statements: + Common-sized income statement percent of total sales + Median financial benchmarks + Common-sized balance sheet percent of total assets What Is A Common-Sized Statement? Common-sizing financial statement information is a process by which each item on the financial statement is reduced to its relationship to the whole statement. For example, the average balance sheet presents each balance sheet item as a percentage of total assets. The average income statement presents each item as a percentage of total sales. The average common-sized statement is computed by determining an average value for the entire group of respondents. For example, when computing the average balance sheet, the cash balance of each pharmacy was totaled, and the assets of each pharmacy were totaled. Then total cash is divided by total assets to arrive at an average percentage of total assets for cash. Each item on the balance sheet gets totaled separately and its percent of total assets is computed in this manner. The result of this process is an average common-sized statement. Average values can be affected by one unusual pharmacy. This possibility should be considered when using average common-sized statements in the analysis process. Since each number is calculated separately as an average, the subtotals may not add up to the sum of the details due to rounding. This applies to both the common-sized income statements and the common-sized balance sheets. Common-Sized Income Statement The income statement, also referred to as the profit and loss or P&L, measures the results of operations for a specific period of time (one year). The key financial issues relating to the income statement are pricing, gross margin maintenance, staff costs control, and operating expense control. The common-sized income statement displays each item as a percentage of total sales. By focusing on the relationship to sales, this statement shows how much of each sales dollar is spent on the various expenses. For example, where cost of goods sold are 73.9 percent for every $1.00 in sales, about 74 cents (73.9 percent of $1.00) is spent on costs of goods, leaving 26 cents in gross profit to cover all other expenses and any profit for the owner. By using this average income statement, pharmacies with different sales volumes can be evaluated for profitability and expense control in common-sized or comparable terms. Median Financial Benchmarks Financial statement information can be used to measure the health and progress of a business and the efficiency of its financial management. These measurements are quantified in standard financial benchmarks. A ratio is simply a comparison of one number to another. By comparing certain numbers from the financial statements, key financial issues can be evaluated, such as: a) efficiency in generating sales from assets, b) efficiency in generating profits from sales, or c) efficiency in structuring liabilities and net worth. For definitions and explanations of the financial operating ratios presented in this report, refer to the Guide to Benchmarking. The guide is specially designed as an educational companion piece to the 2009 NCPA Digest, sponsored by Cardinal Health. NCPA members can download a copy of the guide by visiting the NCPA website at www.ncpanet.org. The median is determined by computing the ratio for each pharmacy, and the results are ranked in order from highest to lowest. The ratio that falls in the exact middle of the list is at the median. The median is preferred to an average value, since it is not distorted by a few unusually high or low values. Median ratios are useful management information because they designate the half-way point of the respondents. Comparing an individual pharmacy s ratio Overview of Financial Statements and Performance Measures 37

to the median reveals whether its performance places it in the top or bottom half of the sample for the specific condition being measured. Common-Sized Balance Sheet The balance sheet represents the most important information about a business with respect to its financial health and its ability to continue operations. While the income statement measures performance for one year, the balance sheet displays the financial condition of the business after all its years of operations. The two sides of the balance sheet are: + Assets what the business owns. + Liabilities And Net Worth what the business owes (to those who supplied the funds to buy the assets the creditors and the owners). The key financial issues related to the balance sheet include solvency, liquidity, risk and efficiency of generating sales, profits, and cash flow from assets. Performance Measures Financial performance is measured by making comparisons between items found on the income statement or balance sheet, and sometimes by using other non-financial statistics. Comparing one number to another produces a ratio. This report contains a number of ratios designed to evaluate the financial health of a independent community pharmacy. For an explanation of how specific ratios are calculated and interpreted, refer to the Guide to Benchmarking. The Guide is designed to be an informative companion piece to the Digest and can be downloaded from the Digest section of the NCPA web site at www.ncpanet.org/digest. For purposes of this report, financial performance is measured in these four critical areas: + profitability gross profits, net profits, and expense control + productivity staff and facilities + financial position asset use and managing debt + cash flow managing the elements of the working capital cycle Profitability Efficiency in generating profits from sales Savings through managing cost of goods sold fall straight to the bottom line as increased net profits. Other opportunities for increased profitability come from controlling payroll expenses, operating expenses, and interest expense. Benchmarks for measuring profitability include gross profit margin and net operating income percentage. Expense controls improve profitability, so expenses and groups of expenses are also monitored (as a percentage of sales). The Digest s reporting of profitability, both in percentage and dollars, is after compensation to owners but before tax. Productivity Managing efficiency of staff and facilities Maintaining reasonable levels of staff for a given sales volume and controlling payroll expenses represents a key area of financial efficiency. Optimum productivity is the result of efficiency in payroll expense control, balanced with effectiveness of staff s efforts. Staff cost per employee or as a percentage of sales are benchmarks for measuring cost efficiency. Sales per employee is a benchmark for measuring the effectiveness of staff efforts. Sales per square foot measures the productivity of facility space. Financial Position Balance sheet management and efficiency of generating sales and profits from your investment in assets Efficiency of asset use can be measured by comparing sales to assets. The return on investment ratios measure how efficiently the companies generate profit from the owners investment. Debt management is measured by the debt to worth ratio. Cash Flow Management Managing the uses of cash and liquid assets in the ongoing operations of the business Inventory, accounts receivable, and accounts payable problems are controllable, and management efficiencies in these areas can be measured. The common benchmarks for measuring these efficiencies are inventory turnover and turn days, accounts receivable turnover and turn days, and accounts payable turnover and turn days. The liquidity, or short-term solvency of the business, is measured by the current and quick ratios. 38 2012 NCPA Digest Sponsored by Cardinal Health

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