The Importance of Benchmarking

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. Business Development Manager, Johnny O’Sullivan writes.

Why benchmark at all? Isn’t it just weighing your neighbour’s work against yours? Not quite.

Over time, best practices emerge based on the experience of what actions led to successful outcomes. Over my time at Fitzgerald Power, I have moved from Corporate Finance Manager to Business Development Manager, a role that suits my current position with two-year-old twins.

With the pharmacy knowledge gained from my 16+ years in pharmacy accounts production and Corporate Finance, I like to think I have sufficient expertise to discuss most pharmacy-related topics and queries. And, what I don’t know, I am sure another member of the team will have the answer to.

But with any new role, comes new challenges. The first challenge I have been tasked with is to create my first blog. As I am rolling out a new pharmacy benchmarking service as part of my new role, I thought there was no better place to start to discuss the merits of benchmarking…

So, what is benchmarking?

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.

Why benchmark your financial performance?

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%, but the sector average benchmark for pharmacies with a similar profile was 44.50%, then straight away you know that your purchasing policy, sales pricing model or turnover mix requires review.

If your pharmacy achieved the sector average gross profit margin, there would be an additional 3.5% 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 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 behind, 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 or exceeding (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.

Conclusion.

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.

Over the last three decades, we have made a name for ourselves as the largest pharmacy transaction brokerage firm in Ireland. Offering creative solutions, we provide bespoke pharmacy services for businesses of all sizes, from independent single-unit operators to multinational mammoths. As one of the top accounting firms Ireland has to offer, we use our experience and knowledge of the sector to provide our clients with unparalleled pharmacy insights. For more information contact our expert team today!

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