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62 Cards in this Set

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For-Profit Organizations
1. Primary Purpose -
2. Examples in Pharmacy -
1. To provide financial return on shareholder's investment
2. Community pharmacies, long-term care & home health care pharmacies, pharmaceutical industry, some hospitals
Not-for-profit Organizations
1. Primary Purpose -
2. Examples in Pharmacy -
1. Provide services to those that may not otherwise obtain them from a for-profit
2. Most hospitals, community health centers, government health care facilities, most academic institutions
Can a not-for-profit organization NOT earn a profit on their operations ove3r the long-term?
NO - all organizations must bring in more than they spend to remain operating
What do not-for-profit organizations do with their profits?
Reinvest back into the organization; generally NOT taxed
What can for-profit organizations do with their profits?
Profits can be spent however owners see ift & generally are taxed
Income Statement
-"profit & loss" statement
-most common financial statement used by pharmacists
-reports on transactions over a period of time
-includes all sales, purchases & expenses
-performed @ end of fiscal year
-monthly/daily for management tool
Sales
$ generated from prescriptions, OTCs, services, etc.
Net Sales
True amount of sales generated; total sales - (merchandise returned, refunds, deductions from TPs, discounts)
Cost of Goods Sold (COGS)
The amount of goods sold in a given time period in terms of their cost to the pharmacy
-sell a prescription, COGS is cost of drug
Gross Margin
= Net sales - COGS
1. Money that can be used to cover operating expenses & provide a profit
2. Gross margins are under pressure in pharmacies - high cost of drugs & consumers wanting control of what they pay
Operating Expenses
-Does NOT include the cost of drugs or other items that are sold
-Ex: wages, utilities, rent/mortgage, licenses/fees, supplies, equipment, depreciation
Depreciation
-A method of calculating the expense of an asset over its entire useful life
-Usually only fixed assets
Methods of Depreciation
1. Straight-line: initial value of asset/# of years it is used = depreciation/year
2. Accelerated - depreciates a lot in early years and less in later years (cars, computers)
How does depreciation show up on an income statement?
It shows up on each year of the life of the asset, not all at once
True/False:
Depreciation does NOT impact cash flow
TRUE
Net Income Before Income Taxes aka "Net Profit Before Income Taxes"
= Gross margin - operating expenses
-Businesses pay income taxes on this amount, the rest is spent at the discretion of the owners or reinvested inot the organization
Balance Sheet
-Keeps track of what a business owns, owes, and investments
-Snapshot of a point in time
Types of Assets
1. Current Assets
2. Fixed Assets
3. Intangible Assets
Current Assets
-Assets that are cash, or can be turned into cash quickly
-Will be used up quickly (<1 year)
-Ex: accounts recievable (owed to pharm), drugs, supplies, cash/checking/savings/stocks/bonds
Fixed Assets
-Will not be used w/in a 1 year period
-Assets that will be of use in the long term, not used up immediately
-Ex: equipment, furniture/fixture, computer hardware/software, buildings, land
Intangible Assets
-Something of value to a business that is not tangible
-Very hard to place a $ value on
-Many lenders won't accept these assets when pharmacies are applying for loans/credit
-Ex: value of a brand name, value of a key employee, value of pharm. education/pharmacist license
Liabilities
-What is owed by a business to others
-Current/Long-term
Current Liabilities
-Amounts that are owed that are due in the short term (one year or less)
-Ex: accounts payable (drugs/supplies), accrued debts (to employees), current portion of long-term debt(portion of mortgage)
Long-term Liabilities
-Owed at any given time but are not due w/in one year
-Ex: bank loan, mortgages
Net Worth
"Equity" or "Owner's Equity"
= Assets - Liabilities
-Includes owner's original investment, subsequent investments, and any profits
The balance sheet MUST follow what equation?
Total Assets = Total Liabilities + Net Worth
Factors impacting financial performance monitored at individual pharmacies:
a. Daily & weekly rx counts
b. Inventory levels & purchasing practices
c. % of prescriptions filled w/ generics
d. employee hours worked - including overtime
e. partial fill %
f. shrinkage: shoplifting, employee theft, lost/spoiled/unsalable goods
Financial Ratio Analysis
A method examining the financial performance of a business using information from income statements & balance sheets to detect trends & problems
Why use financial ratio analysis?
1. Objective
2. Pinpoint areas where changes could improve financial performance.
3. Monitor changes that occur over time (trend analysis).
4. Compare financial performance of different pharmacies
Tests of Profitability
1. Gross Margin %
2. Net Income %
Grose Margin Percentage
Measures the profitability of a business BEFORE operating expenses are paid
TRUE/FALSE:

Gross margin % is steady for pharmacies vary based on the type of operation.
FALSE: Gross margin % VARIES for pharmacies based on the type of operation.
Regardless of the gross margin %, what ulitmately is important is that the gross margin dollars a pharmacy generates are high enough to __________________.
cover their expenses and provide an adequate profit.
As the % of prescriptions paid for by managed care plans has increased, gross margin percentage for pharmacies has __________.
DECREASED
-volume purchased by managed care
-lack of bargaining power of pharmacies
How can pharmacies improve their gross margin?
a. Lower cost of goods sold
b. Price products & services effectively
c. Encourage use of generic drugs when appropriate
d. Accept only favorable 3rd party contracts
Net Income Percentage (Net Profit Percentage)
Examines a pharmacies profitability after all drug costs & operating espenses have been accounted for
How can you improve net profit?
a. Decrease operating expenses & COGS
b. Increase gross margin
c. Increase sales at a higher rate than your costs increase
Financial Ratio Analysis
A method examining the financial performance of a business using information from income statements & balance sheets to detect trends & problems
Why use financial ratio analysis?
1. Objective
2. Pinpoint areas where changes could improve financial performance.
3. Monitor changes that occur over time (trend analysis).
4. Compare financial performance of different pharmacies
Tests of Profitability
1. Gross Margin %
2. Net Income %
Grose Margin Percentage
Measures the profitability of a business BEFORE operating expenses are paid
TRUE/FALSE:

Gross margin % is steady for pharmacies vary based on the type of operation.
FALSE: Gross margin % VARIES for pharmacies based on the type of operation.
Regardless of the gross margin %, what ulitmately is important is that the gross margin dollars a pharmacy generates are high enough to __________________.
cover their expenses and provide an adequate profit.
As the % of prescriptions paid for by managed care plans has increased, gross margin percentage for pharmacies has __________.
DECREASED
-volume purchased by managed care
-lack of bargaining power of pharmacies
How can pharmacies improve their gross margin?
a. Lower cost of goods sold
b. Price products & services effectively
c. Encourage use of generic drugs when appropriate
d. Accept only favorable 3rd party contracts
Net Income Percentage (Net Profit Percentage)
Examines a pharmacies profitability after all drug costs & operating espenses have been accounted for
How can you improve net profit?
a. Decrease operating expenses & COGS
b. Increase gross margin
c. Increase sales at a higher rate than your costs increase
Tests of Liquidity (2)
1. Current Ratio (CR)
2. Quick Ratio (QR)
Tests of Liquidity Measures...
...a business's ability to convert its current assets into cash to pay its current liabilities.
Current Ratio (CR)
Compares current assets to current liabilities. Creditors look at this before deciding to exted a pharmacy credit.
For most pharmacies, the current ratio should be between ___ and ___.
2 and 5
If a pharmacy's current ratio falls below 2...
it's a sign the pharmacy will not be able to pay its debts on time
If a pharmacy's current ratio is above 5...
they mat gave too much money invested in current assets
Quick Ratio or "Acid Test"
Similar to CR, but only considers assets that are cash or could be converted into cash quickly.
Signal of a pharmacy's ability to pay off bills quickly w/o selling inventory.
TRUE/FALSE
Regarding Quick Ratio:
Inventory is considered an asset that can be turned into cash quickly
FALSE

inventory is NOT an asset that can be turned into cash quickly
For pharmacies, the quick ratio should be between __ and __.
1 and 2
Quick ratios above 2...
pharmacy may not be allocating its assets efficiently
Most effective way to improve the QR is to...
decrease inventory as much as possible w/o sacrificing sales
Tests of Solvency
Describe a firm's overall ability to pay its legal debts over the long term.
Debt
-Funds lent to a business/individual
Advantages of Debt
Conveys no ownership/control to lender, so a business can keep all of its profits
Disadvantages of Debt
Increased financial risk, since a business & individuals are legally obligated to make payments on debt