Positive cash flow is the key to running a successful pharmacy. Understanding your cash flow is key to knowing where your revenue is coming from and where it’s going. As a pharmacist, you may not have a financial background and the accounting jargon may be a little confusing until you learn how to review your financial statements. Learning to read financial statements will help you find opportunities to increase profitability and identify the gaps that could hurt your pharmacy. Once you know where to look for additional revenue sources and find hidden risks you will have better control over your financials.
Here is a breakdown of three core financial reports that will help you squeeze more cash out of your pharmacy business.
1. Understand your Profit & Loss Statements
Profit and Loss statements (also referred to as a P&L, income statement, or revenue statement) give you a snapshot of the net income of your business. That’s done by subtracting all of your expenses from the total revenue you bring in. The complexity of these statements varies by business. While a single pharmacy might have a straightforward and simple statement, an owner with multiple pharmacy locations may have an extremely complex statement. P&L statements can be generated to track income and expenses over any period of time. Most commonly, they are produced monthly, quarterly, and annually. A P&L statement allows you the opportunity to review your net income which is essential for making sound business decisions. You will also need a P&L statement if you plan to apply for a small business loan. Knowing these terms and understanding the insights they provide can help you operate a more profitable pharmacy. Read your P&L statement regularly for signs that you are on the right track or for warnings that you might need to make some adjustments. Compare and contrast your most recent statements with past statements for a better picture of your current standings and to help make informed decisions in the future.
2. Perform Trend Analysis
How much do you know about your sales trends right now? You probably wish you knew more about your sales and patients’ buying habits. The more you know, the more effectively you can manage your pharmacy. Performing sales trend analysis can give you valuable insight into the inner-workings of your pharmacy. Use your data to make informed decisions, like when to raise or lower prices on your products or to understand how your pharmacy has performed in a certain time frame. A correctly performed trend analysis gives you an idea about where to make necessary adjustments, so your whole business stays on track. Start with a year-to-year comparison of the last three years, using your end-of-year P&L statements and balance sheets. The year-over-year comparison will highlight if there are any areas of concern. Then start conducting a trend analysis on a quarter-by-quarter basis to fine-tune your financial forecast.
You can use trend analysis to help improve your business by:
- providing evidence to inform your decision-making
- identifying areas where your business is underperforming
- identifying areas where your business is performing well so you can duplicate the success
3. Budget Variance Report
How do you gauge the month to month health and budgets of your pharmacy? The answer is a Budget Variance Report. Variances are the difference between budgeted amounts and actual income or expenses. Use variance reports to make necessary changes in financial forecasts and monitor the performance of your pharmacy. Variance explanations might prompt an owner to put stronger financial controls in place or to reallocate resources. For example, some pharmacy owners might exceed budgeted amounts for marketing expenses because they feel the added spending will lead to a favorable variance in income.
By studying these financial reports, you’ll be able to understand the financial health of your pharmacy. When you understand the numbers, you’ll be able to adjust and create additional cash where it didn’t exist before. If finances aren’t your strong suite, then you’ll need to hire an accountant to analyze and explain the data to you. t’s worth putting in the time to understand or paying someone to help you understand.
Looking for ways to increase profits and stand out in the pharmacy industry? Download our free eBook, 3 Innovative Ways to Compete in the Pharmacy Market