Understanding the financial health of your business is powerful. As an independent pharmacy owner, you spend an incredible amount of time running your business, but do you really understand how to leverage your financial statements? Of course, there is money coming in and money going out – but if you can successfully interpret that data, you can use it to your advantage and make more impactful decisions.
April is Financial Literacy Month and an excellent opportunity to develop a more comprehensive understanding of your pharmacy’s finances. Basic bookkeeping used to be enough, but in today’s world, a backward look doesn’t put you in a position to make the most informed decisions. Growing your pharmacy business starts with goal setting, and goal setting becomes actionable when you have the data to understand the impact on your business.
Do any of these goals look familiar?
- Increasing pharmacy profitability
- Hiring a second pharmacy tech
- Expanding to a second location
Whether these are your specific goals or if you have others on your list, the next step to accomplishing any goal is informed financial decision-making. This blog will cover three essential financial tools to run and grow your pharmacy business.
Pharmacy Financials: A Snapshot, a Movie, and a Crystal Ball
When you know how your business is performing financially, you’re no longer in the dark about your direction. It all starts with the three reports that make up your financial statements (and tell quite a story); the Balance Sheet, Income Statement, and Cash Flow Statement.
We will dive into each of these below, and it may help keep three things in mind: a snapshot, a movie, and a crystal ball.
A Snapshot: Understanding the Financial Health of Your Pharmacy
Your pharmacy’s Balance Sheet will tell you about your assets, liabilities, and equity at a given time. Think about this: if you checked your balance before going grocery shopping, this is similar to the snapshot we mentioned above. It is helpful at the moment, but it’s no way to run a business.
A Movie: The Ups and Downs of a Pharmacy Income Statement
The Income Statement (also known as a Profit and Loss Statement) tells the story of your profitability over a specific time frame. When you look at your Income Statement, it will measure revenue and cost over a period. Typically, an Income Statement comes in two pages. The first shows revenue, costs, and gross profit for your pharmacy, and the second page is a detailed look at the business activity and expenses.
Things to Consider
- What is performing well if you are expanding into another area besides dispensing?
- Are you too focused on a piece of pharmacy business that no longer makes sense?
- Is there an opportunity to invest in upgrading your marketing?
A Crystal Ball: Forecasting Pharmacy Revenue and Expenses
Most owners pay particular attention to the Balance Sheet and Income Statement when it comes to financial reporting. The statement of cash flow is an often overlooked and underutilized tool that you can use to paint a clear picture of your pharmacy’s health. This report shows where your cash is coming in and how you’ve been using it in your pharmacy. As a result, you can leverage this information to create projections and identify trends in your business. Ultimately, understanding your cash flow is key to your financial success.
Financial Literacy for Pharmacy Owners
So how do you get started? If you have an accountant or bookkeeper, set an appointment to review these three financial statements. Using your data can be a daunting task, but that is where the exponential improvements start to happen. Ask them to compare your finances against industry benchmarks.
For example, some good questions to ask are:
- How much inventory should I be carrying?
- Are my payroll expenses in line?
- Are my accounts receivable where they should be?
It also helps if you track pharmacy-specific Key Performance Indicators (KPIs) to understand the financial health of your pharmacy. A few examples are:
Your pharmacy’s Total Gross Margin should be >24%
When your business is not run to maintain this KPI, you may not be able to generate enough cash to cover operating expenses.
Your pharmacy’s Total Expense Ratio should be <19%
Understanding how much of every dollar you earn covers operating expenses is key to ensuring you won’t run into cash flow challenges.
Learn more about how to get started tracking pharmacy KPIs. A strong foundation in financial literacy and knowing where you stand allows you to set a course for improvement. For a more comprehensive breakdown and tools to get you started, download the e-book, Your Financial Health: A Guide for Pharmacy Owners. At PDS, your success is our win. The PDS Financials team is here to help expand your business; schedule a time to talk to one of our experts today.