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62 Cards in this Set
- Front
- Back
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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 |
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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 |
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Can a not-for-profit organization NOT earn a profit on their operations ove3r the long-term?
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NO - all organizations must bring in more than they spend to remain operating
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What do not-for-profit organizations do with their profits?
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Reinvest back into the organization; generally NOT taxed
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What can for-profit organizations do with their profits?
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Profits can be spent however owners see ift & generally are taxed
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Income Statement
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-"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 |
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Sales
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$ generated from prescriptions, OTCs, services, etc.
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Net Sales
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True amount of sales generated; total sales - (merchandise returned, refunds, deductions from TPs, discounts)
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Cost of Goods Sold (COGS)
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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 |
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Gross Margin
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= 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 |
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Operating Expenses
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-Does NOT include the cost of drugs or other items that are sold
-Ex: wages, utilities, rent/mortgage, licenses/fees, supplies, equipment, depreciation |
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Depreciation
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-A method of calculating the expense of an asset over its entire useful life
-Usually only fixed assets |
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Methods of Depreciation
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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) |
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How does depreciation show up on an income statement?
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It shows up on each year of the life of the asset, not all at once
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True/False:
Depreciation does NOT impact cash flow |
TRUE
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Net Income Before Income Taxes aka "Net Profit Before Income Taxes"
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= 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 |
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Balance Sheet
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-Keeps track of what a business owns, owes, and investments
-Snapshot of a point in time |
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Types of Assets
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1. Current Assets
2. Fixed Assets 3. Intangible Assets |
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Current Assets
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-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 |
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Fixed Assets
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-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 |
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Intangible Assets
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-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 |
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Liabilities
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-What is owed by a business to others
-Current/Long-term |
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Current Liabilities
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-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) |
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Long-term Liabilities
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-Owed at any given time but are not due w/in one year
-Ex: bank loan, mortgages |
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Net Worth
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"Equity" or "Owner's Equity"
= Assets - Liabilities -Includes owner's original investment, subsequent investments, and any profits |
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The balance sheet MUST follow what equation?
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Total Assets = Total Liabilities + Net Worth
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Factors impacting financial performance monitored at individual pharmacies:
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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 |
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Financial Ratio Analysis
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A method examining the financial performance of a business using information from income statements & balance sheets to detect trends & problems
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Why use financial ratio analysis?
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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 |
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Tests of Profitability
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1. Gross Margin %
2. Net Income % |
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Grose Margin Percentage
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Measures the profitability of a business BEFORE operating expenses are paid
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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.
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Regardless of the gross margin %, what ulitmately is important is that the gross margin dollars a pharmacy generates are high enough to __________________.
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cover their expenses and provide an adequate profit.
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As the % of prescriptions paid for by managed care plans has increased, gross margin percentage for pharmacies has __________.
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DECREASED
-volume purchased by managed care -lack of bargaining power of pharmacies |
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How can pharmacies improve their gross margin?
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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 |
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Net Income Percentage (Net Profit Percentage)
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Examines a pharmacies profitability after all drug costs & operating espenses have been accounted for
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How can you improve net profit?
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a. Decrease operating expenses & COGS
b. Increase gross margin c. Increase sales at a higher rate than your costs increase |
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Financial Ratio Analysis
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A method examining the financial performance of a business using information from income statements & balance sheets to detect trends & problems
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Why use financial ratio analysis?
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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 |
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Tests of Profitability
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1. Gross Margin %
2. Net Income % |
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Grose Margin Percentage
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Measures the profitability of a business BEFORE operating expenses are paid
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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.
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Regardless of the gross margin %, what ulitmately is important is that the gross margin dollars a pharmacy generates are high enough to __________________.
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cover their expenses and provide an adequate profit.
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As the % of prescriptions paid for by managed care plans has increased, gross margin percentage for pharmacies has __________.
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DECREASED
-volume purchased by managed care -lack of bargaining power of pharmacies |
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How can pharmacies improve their gross margin?
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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 |
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Net Income Percentage (Net Profit Percentage)
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Examines a pharmacies profitability after all drug costs & operating espenses have been accounted for
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How can you improve net profit?
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a. Decrease operating expenses & COGS
b. Increase gross margin c. Increase sales at a higher rate than your costs increase |
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Tests of Liquidity (2)
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1. Current Ratio (CR)
2. Quick Ratio (QR) |
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Tests of Liquidity Measures...
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...a business's ability to convert its current assets into cash to pay its current liabilities.
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Current Ratio (CR)
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Compares current assets to current liabilities. Creditors look at this before deciding to exted a pharmacy credit.
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For most pharmacies, the current ratio should be between ___ and ___.
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2 and 5
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If a pharmacy's current ratio falls below 2...
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it's a sign the pharmacy will not be able to pay its debts on time
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If a pharmacy's current ratio is above 5...
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they mat gave too much money invested in current assets
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Quick Ratio or "Acid Test"
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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. |
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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 |
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For pharmacies, the quick ratio should be between __ and __.
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1 and 2
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Quick ratios above 2...
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pharmacy may not be allocating its assets efficiently
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Most effective way to improve the QR is to...
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decrease inventory as much as possible w/o sacrificing sales
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Tests of Solvency
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Describe a firm's overall ability to pay its legal debts over the long term.
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Debt
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-Funds lent to a business/individual
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Advantages of Debt
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Conveys no ownership/control to lender, so a business can keep all of its profits
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Disadvantages of Debt
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Increased financial risk, since a business & individuals are legally obligated to make payments on debt
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