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Inflation Gauge—Measuring Growth in the Pharmacy
Inflation Gauge Measuring Growth in the Phannaey By HARRY A. SMITH
The rampant rate of inflation can readily obscure the true growth rate in revenue in the pharmacy. A consumer price index (CPI) that matches the product groups usually handled by pharmacies would be a useful tool for gauging growth. However, since the product mix offered to the public varies from pharmacy to pharmacy, several measures would be more accurate than one general yardstick. To provide pharmacists with the broadest possible range of standards, four price indexes have been constructed.* The indexes were gathered from data published in Con-
be used as a gauge of revenue growth for 1978 vs. 1977. A more realistic yardstick would be the constructed index in Table 2. This index, which covers five product groups, also more nearly matches smaller pharmacies with modest activity in stationery, magazines, and candy. Eliminating photo, tobacco, and toiletry products gives an index suitable for gauging the real growth rate in pharmacies with 75% pharmaceutical and 25% nonprescription revenues, as shown in Table 3.
sumer Price Index Detailed Report (U.S. Department of Labor, Bureau of Labor Statistics, Washington, DC). The percentages of revenues for the selected product groups were derived from published data .** Each index was computed as a weighted average using the percentage of total revenues for each product group as the weight. The most comprehensive index, which covers eight product groups, is presented in Table 1. It should be noted that the definition for several product groups changed in 1978. The changes had a modest effect on the CPI for prescription drugs and toiletries, a moderate effect on photo products, and a drastic impact on magazines and candy. Because of these changes the constructed index in Table 1 should not
•These pharmacy indexes are more relevant for managerial analysis than the overall CPl. The annual increases in the CPI, over the previous year, beginning in 1975, were: 1975 1976 1977 1978 1979 4.8% 6.8% 9.0% 13.4% There are obvious differences between the CPI trend and the pharmacy index trend. However, changes in the pharmacist"s salary and the total income (salary plus net profit) of the pharmacist·proprietor should be compared with CPl. "Drug Topics, p. 24 Uune I, 1979).
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In pharmacies wherein prescriptions account for most of the revenues the CPI for prescription drug products is appropriate. To gauge whether the pharmacy has experienced real growth, simply compare the percentage increase in revenues with the percentage change in the comparable index for the same period. If the percentage change in revenues exceeds the percentage change in the index, then the pharmacy has experienced real growth, and the increase is more than a mere reflection of inflation. Conversely, if the percentage change for a particular year is less than the percentage change in the index, then the pharmacy has actually lost ground. For example, if 1979 revenues increased 8.7% over 1978 for a fullmerchandise pharmacy, the increase in revenues is 1.5 percentage points greater than the increase in inflation of 7.2, as calculated from the last two columns of Table 1:
118.1 - 110.2 = 7.9 percentage points difference and 7.9 .;. 110.2 = 7.2 percentage change 8.7 7.2 = 1.5 greater percentage point change in volume over inflation
In these times of rapid inflation, if the "real" growth in terms of revenue and net income is better than the inflationary growth rate, a pharmacy can be considered successful. The set of indexes presented in this article provides a convenient method for making these comparisons. Two cases will illustrate more clearly how this is done, Case 1 A pharmacy had revenues of $220,000 for 1979, 90% of which was prescription sales, and a net income of $13,000 (after deducting a salary for the self-employed pharmacist). Comparable figures for 1978 were $204,000 and $12,000, respectively. The $16,000 increase in revenues represented a 7.8% increase, and the $1,000 increase in net profit represented an 8.3% increase. The inflation index for prescriptions only, for the period, increased by 7.8%, e.g., (142.4- 132.1) -:- 132.1 x 100 = 7.8%. Pharmacy revenues just about kept pace with inflation; however, net income outpaced inflation by half a percentage point. Case 2 A medium size pharmacy with a revenue mix comparable to Table 2 had the following economic experience: For 1979, revenues totaled $324,000, and net income was $15,200. For 1978, revenues came to $292,000, and net income to $14,400. The $32,000 increase in revenues represented an 11.0% increase, whereas the $800 increase in net income represented only a 5.6% increase. The comparable index for the same period increased 7.1%. Analysis The pharmacist in Case 1 managed to stay ahead. He was able to increase revenue level by an amount equal to inflation, thus
American Pharmacy Vol. NS20, No. 5, May 1980/290
The rampant rate of inflation can readily obscure the true growth rate in revenue in the pharmacy. A consumer price index (CPI) that matches the product groups usually handled by pharmacies would be a useful tool for gauging growth. However, since the product mix offered to the public varies from pharmacy to pharmacy, several measures would be more accurate than one general yardstick. To provide pharmacists with the broadest possible range of standards, four price indexes have been constructed.* The indexes were gathered from data published in Con-
be used as a gauge of revenue growth for 1978 vs. 1977. A more realistic yardstick would be the constructed index in Table 2. This index, which covers five product groups, also more nearly matches smaller pharmacies with modest activity in stationery, magazines, and candy. Eliminating photo, tobacco, and toiletry products gives an index suitable for gauging the real growth rate in pharmacies with 75% pharmaceutical and 25% nonprescription revenues, as shown in Table 3.
sumer Price Index Detailed Report (U.S. Department of Labor, Bureau of Labor Statistics, Washington, DC). The percentages of revenues for the selected product groups were derived from published data .** Each index was computed as a weighted average using the percentage of total revenues for each product group as the weight. The most comprehensive index, which covers eight product groups, is presented in Table 1. It should be noted that the definition for several product groups changed in 1978. The changes had a modest effect on the CPI for prescription drugs and toiletries, a moderate effect on photo products, and a drastic impact on magazines and candy. Because of these changes the constructed index in Table 1 should not
•These pharmacy indexes are more relevant for managerial analysis than the overall CPl. The annual increases in the CPI, over the previous year, beginning in 1975, were: 1975 1976 1977 1978 1979 4.8% 6.8% 9.0% 13.4% There are obvious differences between the CPI trend and the pharmacy index trend. However, changes in the pharmacist"s salary and the total income (salary plus net profit) of the pharmacist·proprietor should be compared with CPl. "Drug Topics, p. 24 Uune I, 1979).
50
In pharmacies wherein prescriptions account for most of the revenues the CPI for prescription drug products is appropriate. To gauge whether the pharmacy has experienced real growth, simply compare the percentage increase in revenues with the percentage change in the comparable index for the same period. If the percentage change in revenues exceeds the percentage change in the index, then the pharmacy has experienced real growth, and the increase is more than a mere reflection of inflation. Conversely, if the percentage change for a particular year is less than the percentage change in the index, then the pharmacy has actually lost ground. For example, if 1979 revenues increased 8.7% over 1978 for a fullmerchandise pharmacy, the increase in revenues is 1.5 percentage points greater than the increase in inflation of 7.2, as calculated from the last two columns of Table 1:
118.1 - 110.2 = 7.9 percentage points difference and 7.9 .;. 110.2 = 7.2 percentage change 8.7 7.2 = 1.5 greater percentage point change in volume over inflation
In these times of rapid inflation, if the "real" growth in terms of revenue and net income is better than the inflationary growth rate, a pharmacy can be considered successful. The set of indexes presented in this article provides a convenient method for making these comparisons. Two cases will illustrate more clearly how this is done, Case 1 A pharmacy had revenues of $220,000 for 1979, 90% of which was prescription sales, and a net income of $13,000 (after deducting a salary for the self-employed pharmacist). Comparable figures for 1978 were $204,000 and $12,000, respectively. The $16,000 increase in revenues represented a 7.8% increase, and the $1,000 increase in net profit represented an 8.3% increase. The inflation index for prescriptions only, for the period, increased by 7.8%, e.g., (142.4- 132.1) -:- 132.1 x 100 = 7.8%. Pharmacy revenues just about kept pace with inflation; however, net income outpaced inflation by half a percentage point. Case 2 A medium size pharmacy with a revenue mix comparable to Table 2 had the following economic experience: For 1979, revenues totaled $324,000, and net income was $15,200. For 1978, revenues came to $292,000, and net income to $14,400. The $32,000 increase in revenues represented an 11.0% increase, whereas the $800 increase in net income represented only a 5.6% increase. The comparable index for the same period increased 7.1%. Analysis The pharmacist in Case 1 managed to stay ahead. He was able to increase revenue level by an amount equal to inflation, thus
American Pharmacy Vol. NS20, No. 5, May 1980/290