15 Financial Reports

Pharmacy Management: Essentials for All Practice Settings Desselle, Shane P.; Zgarrick, David P.

Learning Objectives:

Compare and contrast the fundamental objectives of a balance sheet and an income statement.

Demonstrate the relationship between a balance sheet and an income statement for a given fiscal year.
Describe the utility of financial ratios and interpret basic financial ratios used in community pharmacy practice. Describe and integrate the financial information depicted in a balance sheet and an income statement in community pharmacy practice. Define the flow and funds involved in community pharmacy practice, including expenses, prescription adjudication, receipt of payment, and revenue generation. Describe the basic financial reports used in hospital pharmacy practice.

Scenario:

Marco and Diana met at a coffee shop to catch up on the things they have been doing since they graduated from pharmacy school 2 years ago. Marco had always wanted to own a community pharmacy but was currently working in a chain community pharmacy to gain experience and save money. Diana had recently finished a cardiology fellowship and had accepted a clinical faculty position at a large teaching hospital. Diana was interested in hospital pharmacy management and was hoping eventually to be given managerial responsibilities in the pharmacy department. Over the past 2 years, Marco and Diana had begun to gain an appreciation for the need to track the use of money. Marco was beginning to pay off his student loans and beginning to save money for his future. While Diana was able to defer payment on her loans during her residency and fellowship, she had to learn to manage her own money wisely given that she earned less during the past 2 years than many of her friends who took pharmacist positions immediately on graduation.

0 Both were beginning to understand that to become a successful

hospital pharmacy administrator or independent pharmacy owner, one needs to also understand how money moves through an organization.

Just as Marco and Diana have had to carefully track their own finances to meet their personal financial goals, tracking the use and flows of money is an essential element in operating any type of pharmacy. They hoped that if they could understand the flows of money in personal finance, they would be able to learn the financial management principles necessary to succeed as pharmacy administrators. Marco and Diana decided to meet one a month for the next 3 months. Over the course of these meetings, they planned to learn more about accounting financial reports, and their uses in pharmacies.

Introduction:

Accounting

A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions (AICPA) dynamic process by which organizations determine and report how they finance their activities and use their money. Major use: track the flow of money (cash or credit) between financing and investing activities.

0 Financial Reports
essential to understanding the flow of money

prepared based on standard accounting principles

Introduction:

Assets
things that a business owns that can be used to generate income

0 Financing
needed to obtain the money needed to acquire an asset
may come from liabilities or equities

0 Liabilities
money owed to others

0 Owners equity
the owners own funds

Review of Accounting Principles:

Obtaining Financing

0 Making Investments 0 Conducting a Profitable Operation

Review of Accounting Principles:

Obtaining Financing
Obtaining funds from owners or creditors

Shareholders
owners that fund the activities of the corporation have a claim on the companys assets, and their investments in the company are rewarded by either regular distributions from the company to the owners or by an increase in the value of the companys total assets owing to profitable operations.

Creditors
provide funds but do not receive dividends
require the company to repay the funds with interest over a specified period of time.

Review of Accounting Principles:

Making Investments
Types of investments a company makes depend largely on the type of business it is conducting. Acquisition of inventory, computer software & hardware, buildings, and land. Acquiring resources necessary to employ appropriate number of pharmacists, pharmacy technicians, and other staff.

Review of Accounting Principles:

Conducting a Profitable Operation

Three Essential Financial Statements

Balance sheet Income Statement Statement of Cash Flows

Three Essential Financial Statements

Balance Sheet
Provides a snapshot of an organization's assets, liabilities, and shareholder equity at any particular point in time. May prepare this statement at any point in time.

Total assets = total liabilities and shareholders' equity

Three Essential Financial Statements

Income Statement
Provides information about income and expenses.
Net Income/Net profit/Earnings difference between income and expenses

tells the reader what happens to an organization over a period of time.

Three Essential Financial Statements

Statement of Cash Flows

Financial Ratios
Used to examine a organizations financial performance. Allow users of financial information to make comparisons between:
A single organization and the entire industry average Differences within an organization over time Two or more units with a single organization Two or more organizations with each other

Only as valid as the financial information on which it is based.

Financial Ratios

Profitability ratios
Provide a method to measure the overall financial success of a company. (success in generating profits)
Gross Profit Margin Net profit Margin Return on assets Return on equity

Financial Ratios

Profitability ratios
Gross Profit Margin = (sales cost of goods sold) total sales Provides information on the companys ability to generate gross profits. gross profit margin ratio availability of funds for the companys other expenses

Financial Ratios

Profitability ratios
Net profit Margin = net income (after taxes) total sales Indicates the fraction of net profit that is generated for every dollar of sales. Used to determine how well the organization manages its operating expenses. Used to compare the performance of two or more pharmacies within a chain or to assess the performance of a pharmacy against industry averages.

Financial Ratios

Profitability ratios
Return on assets = net income average total assets

Provides information on the companys ability to generate profits using the companys assets.
Effective use of assets; ROA ratio Return on equity (return on investment) = net income average owners equity measure of how well the company can make profits from funds provided by owners or investors. ROE; maximized profits

Financial Ratios

Liquidity ratios
provide information on the businesss ability to meet its short-term financial obligations. Current ratio and quick ratio

Current Ratio
= current assets current liabilities current ratio; fewer risks in meeting financial obligations Current ratio > 5; too high; a sign of a company that is too conservative, leaving too much of its money in the bank rather than investing it in ways that could help the organization grow . current ratio (<2); organization has low current assets (especially cash) relative to its liabilities (often bills that are due in 30 to 60 days)

Financial Ratios

Liquidity ratios
Quick Ratio (acid test) = (current assets inventories prepaid expenses) current liabilities Quick assets = assets that are easily converted to cash Provides a better picture of a companys liquidity and its ability to meet its financial obligations. Standard quick ratio at least 1

Financial Ratios

Turnover ratios
measure the efficiency with which an organization uses its assets. Also called efficiency ratios or assets utilization ratios

Inventory turnover and receivables turnover

Financial Ratios

Turnover ratios
Inventory Turnover Ratio = cost of goods sold average inventory (at cost) Measures how quickly an organizations inventories are sold. Cost of goods sold is found on the income statement Average inventory comes from the balance sheet. inventory turnover ratios (6 or below); inventory is too large for operations and that cash that could be better spent elsewhere is tied up in inventory. inventory turnover ratio; organization was able to sell and replace its inventory with high efficiency and generate higher revenues and profits.

Average inventory is kept too low;loss of sales and profits

Financial Ratios

Turnover ratios
Receivables turnover ratio = credit sales average accounts receivable Measures how quickly receivables (money owed to the organization by others) are turned into cash. receivables turnover ratio; organization can collect its receivables efficiently while keeping the total amount it is owed by others at any given time relatively low.

Average collection period indicates the number of days (on average) that credit sales remain in accounts receivable before they are collected. Divide the receivable turnover ratio by 365.

Financial Reports in Community Pharmacy Practice

Financial ratios, Balance sheet and income statements Monitor: daily no. of prescriptions filled, total amount paid by each third-party payer, total copayments made by patient, total cost of drug products used to dispense these prescriptions. Gross margin is calculated. Identifies plans with low reimbursement rates. gross margin, manager should examine the cost of prescription products dispensed to ensure that the pharmacy had received the best prices from the wholesaler.

Financial Reports in Community Pharmacy Practice

Revenues and expenses are compiled each month and entered into the income statement report. Monthly income statement and balance sheet to provide managers with a more precise picture of the financial status of the pharmacy. Revenues on the monthly income statement have to be revised once reimbursements have been received from third-party payers.

Financial Reports in Hospital Pharmacy Practice

Budget for a hospital pharmacy department: drug costs and labor ; part of the budget of the entire hospital. 4 managerial principles: plan, lead, organize, control are relevant in financial planning Director of pharmacy: creation of policies and procedures to manage expenditures. Cost centers: they dont generate revenue directly and only help to contribute to their hospitals overall profitability by using drug therapy and clinical pharmacy services to help lower the overall cost of caring for patients.

Financial Reports in Hospital Pharmacy Practice

Director of pharmacy manages the performance of this cost center by evaluating complex financial reports that compare actual to budgeted values and the variance between budgeted and actual costs. (expense report: monthly or weekly) Productivity assessment reports: use historical data to create budgets and monitor trends over time. External financial reports: gauge the efficiency of their operation by comparing their financial ratios and other indicators with national averages. Revenue/expense report is generated every moth so that the cost centers expenses as a percentage of total revenue can be monitored closely.