Though benchmarking is oftentimes dismissed by the entrepreneurial community as a symptom of large company conservatism, the good reasons for the practice far outweigh the bad, argues Johnny O’Sullivan of Fitzgerald Power.
Why benchmark at all? Isn’t it just weighing your neighbour’s work against yours? Not quite.
Though success is an abstract notion — the goal, for us all, is to climb to the top of the mountain. But without a proper means of evaluating our current level, understanding what it takes to make the next step and consistently tracking progress, success in business becomes devoid of significance.
Over time, best practices emerge based on the experience of what actions led to successful outcomes. With the pharmacy knowledge gained from my16 years in pharmacy accounts production and corporate finance, we introduced our benchmarking service due to the demand for this information from clients.
Benchmarking involves comparing an organisation’s financial performance metrics —oftentimes measured in Key Performance Indicators (KPIs) — to those of its peers, sector standards, or best practices. It provides insights into how well a company is performing relative to others in the same industry or sector.
Performance comparison
As with any business, each owner will have their own way of running their business, be it from their purchasing policies to their private sales pricing model. Benchmarking is an invaluable exercise to ensure that the policies being implemented in the pharmacy are achieving the best results. For instance, if you were generating a gross profit margin of say 41.30 per cent, but the sector average benchmark for pharmacies with a similar profile was 45.62 per cent, then straight away you know that the purchasing policy or sales pricing model requires review.
If your pharmacy achieved the sector average gross profit margin, there would be an additional 4.32 per cent of turnover added to the bottom line of the business. In these challenging times with labour cost inflation and stock acquisition constraints, the additional gross profit margin could help negate these ever-increasing costs.
Continuous improvement
By benchmarking your KPIs regularly you can monitor the performance of your pharmacy for any operational changes implemented. This can help an owner understand what operational changes are working and more so what doesn’t work. To garner the most from this approach, I would strongly recommend preparing live monthly management accounts (live meaning accounts prepared within 30 days of the month’s end), as it will be difficult to understand the effect of any operational changes when comparing annual financial results due to the time period between the year-end accounts.
Setting realistic goals
Realistic goals should be set for the business. This can be done by understanding the current KPI projections for both your business and your sector. Unrealistic targets, though they may seem motivating, only lead to feelings of failure and low team morale if not met.
Performance accountability
In your pharmacy, you might have a person who looks after purchasing and another who looks after staffing. Benchmarking establishes a basis for accountability. It allows management to hold departments accountable for meeting or exceeding sector benchmarks.
Resource allocation
Benchmarking aids in effective resource allocation. By identifying areas where the pharmacy is lagging, owners can allocate resources strategically to improve performance in those specific areas.
Benchmarking also can provide ammunition to break internal log jams and identify risks that can potentially be mitigated when undertaking new initiatives. For those with existing programs who are struggling to communicate value, benchmarking is an opportunity to articulate strengths and address areas for improvement.
Securing the best possible returns
As noted previously, I have spent the last number of years in the corporate finance space. I have been involved in both the sale and purchase side of pharmacy disposals. Unless there are succession plans in place, at some stage, the pharmacy owner will be bringing the pharmacy to the market. I can confidently say that a pharmacy that is continuously achieving (for the last three financial years), the sector average KPIs will attract more potential purchasers and also command a higher sales price.
From the purchaser’s perspective, they do not want to be paying for potential gross profit margin gains or other potential earnings. If the pharmacy has proven results over a three-year period in line with the sector average KPIs, it will make for a more attractive proposition to the purchaser and generally a smoother sale.
Benchmarking KPIs is a strategic management practice that facilitates performance improvement, goal setting, and informed decision-making, ultimately contributing to the overall success and competitiveness of an organisation.
Whether you are a large pharmacy chain or a small independent community pharmacy, the owner should be benchmarking their KPIs to ensure they are maximising the return on the hard-earned turnover being generated.
For more information on Fitzgerald Power visit fitzgeraldpower.ie.
Johnny O’Sullivan
Senior Manager, Corporate Finance, Fitzgerald Power
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