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76 Cards in this Set

  • Front
  • Back
for-profit organizations primary purpose
to provide a financial return on their shareholder's investments
not-for-profit organizations primary purpose
to provide services to a community that may not otherwise obtain them from for-profit organizations
not-for-profit organizations examples
-most hospitals
-community health centers
-govt health care facilites
-most academic institutions
What do not-for-profit organizations have to do w/ their profits?
must be reinvested in the organization and are generally not taxed
What do for-profit organizations have to do w/ their profits?
spend however the owners see fit and generally are taxed
What is the most common financial statement used by pharmacies?
income statement
What does an income statement include
-all sales, purchases, and expenses of a business over a period of time
Net Sales formula
Total sales - merchandise returned - allowances for defective goods and services - deductions from third-party payers - employee discounts
Cost of Goods Sold (COGS) formula
Beginning inventory + purchases - ending inventory
(only cost of drug that is used in Rx)
Gross Margin formula
net sales - cost of goods sold
What can gross margin money be used for?
to cover operating expenses and provide a profit
What are operating expenses?
selling, administrative, and general overhead costs involved in a business's operations throughout the period
What do operating expenses not include?
cost of drugs or other items that are sold
examples of operating expenses in a pharmacy
6)supplies and equipment
What type of assets are depreciated?
only fixed assets
What are the two methods of depreciation?
Net income before income taxes formula
gross margin - operating expenses
What does a balance sheet keep track of?
-assets, liabilities, and what the owners have invested in the business (net worth, equity)
-snapshot of financial picture at a point of time
Current assets definition
assets that are cash or can quickly be turned into cash < 1year
examples of current assets in a pharmacy
1)accounts receivable
Fixed assets definition
assets that will not be used up within 1 year period
examples of fixed assets in the pharmacy
-computer hardware/software
Intangible asset definition
something of value to a business that is not tangible (many lenders/creditors will not accept intangible assets when pharmacies are applying for loans or credit)
examples of intangible assets in the pharmacy
1)value of a brand name
2)value of key employee
3)value of your pharmacy education/pharmacist license
Current liabilites definition
amounts that are owed at any given time that are due in the short-term <1yr
examples of current liabilties
1)accounts payable
2)accrued debts (money owed to its employees and others that have already been provided)
3)curret portion or long-term debt (portions of mortgages and bank notes that will be paid in the coming year)
Long-term liabilities definition
amounts that are owed at any given time but are not due w/in one year
examples of long-term liabilities
1)bank loans
Net worth (equity) definition
what actually belongs to the owner of a business (Assets - liabilities)
Equation that the balance sheet must always obey
Total Assets = Total liabilities + Net Worth
Why do pharmacists use financial ratio analysis?
1)objective way to assess financial condition of pharmacy
2)pinpoint areas where changes would improve FP
3)trend analysis
4)compare pharmacies to eachother in terms of FP
What does gross margin % measure?
the profitability of the business BEFORE operating expenses are paid
Correlation between sales, gross margin percentage, and gross margin dollars
pharmacies that have higher amounts of sales can have low gross margin % and still generate a higher amount of gross margin dollars that other types of pharmacies
Normal values for gross margin %
independent = 24%
grocery store pharmacies/some chain = 15%
nursing home = 50%
Correlation between gross margin % and managed health care
as percentage of RX's paid for by managed care plans has INCREASED, gross margin % for pharmacies has DECREASED
What are 4 ways pharmacies can improve their gross margins?
1)lower COGS
2)price products/services effectively
3)encourage use of generic drugs
4)accept only favorable 3rd party contracts
Net income % definition
examines a pharmacy's profitability AFTER all drug costs and operating expenses have been accounted for
normal values for net income %
What are 3 ways to improve net profit?
1)decrease operating expenses and COGS
2)increase gross margin
3)increase sales at a higher rate than your costs increase
What are the 2 tests for overall performance?
1)return on equity
2)return on assets
What does ROE examine?
how effectively the funds invested in the firm by its owners are being used
Goal value of ROE
What are 2 ways that ROE can be improved?
1)increasing net profits
2)decreasing owner's equity as a source of financing operations
financial leverage definition
degree to which DEBT (loans, credits) is used to finance the purchase of assets (highly leveraged = high use of debt)
What are the benefits of financial leverage? (2)
1)purchase needed assets before you have the cash
2)keep more cash on hand for other uses
What are the risks of financial leverage? (2)
1)debts must be paid back, often w/ interest
2)too much debt can lead to financial problems
What does return on assets measure?
how effectively all funds available to the manager, both debt and equity, are being used
return on assets normal value
at least 15%
How can return on assets be improved? (2)
1)increasing net profits
2)decreasing assets
What are 2 tests of liquidity?
1)current ratio
2)quick ratio
What do tests of liquidity meausure?
a business's ability to convert its current assets into cash that acan be used to pay its current liabilities (accounts payable, accrued expenses)
Extended formula for current ratio : CR=current assets / current liabilities
CR = (Cash + Accounts Receivable + Inventories)
What is the normal range of values for current ratio?
If current ratio falls below 2.0, what is this a sign of?
that the pharmacy may have trouble paying its debts on time
If current ratio is above 5.0, what is this a sign of?
the pharmacy may have too much money invested in current assets (could invest it in other areas such as fixed assets, expansion, developing new products and services)
What is the quick ratio (acid test)?
similar to current ratio, but only considers assets that are cash or could be converted into cash quickly (accounts receivable)
What are the normal range of values for quick ratio?
What do quick ratios below 1.0 tell us?
seen by creditor's as danger signs of not being able to pay current liabilities in the future
What are quick ratios above 2.0 a sign of?
that a pharmacy might not be allocating its assets efficiently
What is the most effective way to improve the quick ratio?
decrease inventory as much as possible w/o sacrificing sales
What is an example of a test of solvency?
debt-to-equity ratio
What do solvency ratios tell us?
describe a firm's overall ability to pay its legal debts over the long term
What is the definition of debt?
funds LENT to a business or individual (bank loans, credit from suppliers)
What are advantages of debt? (1)
conveys no ownership to lender, so a business or individual can keep all of its profits
What are disadvantages of debt? (1)
increased financial risk (legally obligated to make payments on debt)
What is the definition of equity?
funds INVESTED by self or others that represent OWNERSHIP (stock, owner's initial investment)
What are the advantages of equity? (2)
1)no legal obligation to repay investors
2)allows businesses and individuals to spread the risk of owning a business onto others
What are the disadvantages of equity? (2)
1)rate of return paid to equity holders generally is higher than the rate of interest paid on debt
2)shareholders have a right to a voice in the operation of the business
Do lenders prefer that pharmacies have low or high solvency ratios?
Should an older pharmacy or newer pharmacy have lower solvency ratios?
older pharmacies
What is an example of a test of efficiency?
inventory turnover
How many times do community pharmacies want to try to turn over their entire inventory per year?
5-10 times
Why does prescription inventory usually achieve more turns in a pharmacy than non-prescription inventory? (3)
1)more expensive (more effort placed on control of this asset)
2)computerized inventory control systems
3)vendors offer "just in time" deliveries
What is a high inventory turnover a sign of?
efficient use of assets, which leads to higher return on equity and return on assets
How can inventory turnover be improved? (4)
1)decrease amount and dollar value of inventory kept on hand
2)carry only items patients need and use
3)have expensive items on hand only when you know you will need them
4)TRAIN ur pts and staff to anticipate needs for expensive items
What are the limitations of financial ratio analysis? (3)
1)only as good as data used to calculate the ratios
2)income statements and balance sheets are made up of historical data
3)financial ratios are interdependent