PCM UNIT 7

financial leverage

The degree to which debt (loans, credit) is used to finance the purchase of assets. Highly leveraged = High use of debt.

Two ways that ROE can be improved are:

(1) increasing net profits (2) decreasing owner's equity as a source of financing operations

Kay-Lee Allen, PharmD, wants to estimate the cost of a cholesterol screening service at her pharmacy. Her salary expense is $150,000/year. Dr. Allen performs cholesterol screenings, dispenses prescriptions, and manages the OTC department at her pharmacy. Rent for the pharmacy is 1% of total sales. Which of the following would be the most likely to be both a direct cost and a fixed cost for the cholesterol screening service? Answers: Dr. Allen's salary expense A computer program purchased specifically to track patient cholesterol levels The Cholestec cartridges needed for to perform each cholesterol test None of the above (no cost can be both direct and fixed)

A computer program purchased specifically to track patient cholesterol levels

Financial Ratio Analysis

A method examining the financial performance of a business that uses information from income statements and balance sheets to detect trends and problems.

cost

A sacrifice of resources. Represented by outlays of cash, promises to pay cash in the future, or the expiration of the value of an asset. Example: The dollar amount a pharmacy pays to purchase a computer system (or any other fixed asset).

Debt advantages and disadvantages

Advantages: Debt conveys no ownership or control to the lender, so a business or individual can keep all of its profits. Disadvantages: Increased financial risk, since a business and individuals are legally obligated to make payments on debt.

Which of the following statements about the use of debt to finance a business such as a pharmacy is true? A. Debt conveys a share of the ownership of a pharmacy to the lender B. A pharmacy must pay a share of their net profits to their lender C. Pharmacies are legally obligated to make payments on their debt, regardless of their sales and profits D. Debt allows a pharmacy to share the risk of owning the business onto others

C. Pharmacies are legally obligated to make payments on their debt, regardless of their sales and profits

What may a not-for-profit organization do with their net profits/fund balance? A. Pay a dividend to their shareholders B. Spend them at their owner's discretion C. Reinvest them back into the organization D. Not Applicable (not-for-profit organizations may not generate a net profit/fund balance)

C. Reinvest them back into the organization

shrinkage

C. Goods that are not available to be sold or used - Shoplifting - Employee theft- most - Lost/spoiled/unsalable merchandise

Current Ratio

Compares current assets to current liabilities. Creditors look at this ratio before deciding to extend a pharmacy credit.

Facility Related Costs

Costs allocated based on the ratio of floor space dedicated to the activity to the floor space of the entire pharmacy

Indirect Variable Costs

Costs allocated based on the ratio of sales generated by the activity to total sales.

Allocation of employee salaries:

Costs corresponding to the percentage of time spent performing the activity are allocated

direct costs

Costs that are directly caused by or result from performing a particular activity. These costs would not occur if that activity were not performed.

indirect costs

Costs that are related to, but not directly caused by or result from performing a particular activity. These costs would still occur even if that activity were not performed.

variable costs

Costs that change in proportion to changes in sales volume. When the sales volume is $0, these costs will also be $0. Examples: -Rent (if varies as a % of sales) -Drugs -Supplies -Some wages and benefits (hourly employees) -Promotional expenses (advertising, marketing)

Which of the following assets are most likely to be included as part of a pharmacy's depreciation expense on their income statement? A. Pharmacists and other personnel B. Medications C. Prescription labels and containers D. Shelves and fixtures

D. Shelves and fixtures

Net Income Percentage (Net Profit Percentage, Net Operating Income Percentage)

Examines a pharmacy's profitability after all drug costs and operating expenses have been accounted for.

Impact of depreciation on income statement

Expense of purchasing an asset is spread out over its useful life, rather than just in the period when it was purchased.

Equity

Funds invested by self, other individuals, or an organization that represent ownership (i.e., stock, owner's initial investment, reinvested profits/margins)

debt

Funds lent to a business or individual (i.e., bank loan, credit from supplier)

Percentage of prescriptions filled with generic medications

Higher generic fill % generally results in higher Gross Margin% and higher net income%

Salary Expense

Includes wages, fringe benefits, and payroll taxes paid by the employer.

Facility Related Indirect Costs

Indirect costs related to the physical facilities where the activity will take place (i.e., fixed rent, repairs and maintenance on buildings and fixtures, utilities (other than telephone), depreciation on fixtures and buildings (if owned by pharmacy), store liability insurance). These costs would still occur to some extent even if the service were not offered.

Indirect Variable Costs (non-facility

Indirect costs which are not related to the physical facilities of the pharmacy (i.e., rent as a % of sales, telephone, promotional expenses (e.g., advertising), miscellaneous expenses). These costs tend to vary as the amount of sales varies, and would still occur to some extent even if the activity were not performed.

Tests of Liquidity

Measures a business's ability to convert its current assets into cash that can be used to pay its current liabilities (accounts payable, accrued expenses).

accrued debts

Money a pharmacy owes to its employees and others for services that have already been provided, but not yet paid for

Accounts Payable

Money that is owed by a pharmacy to others, usually for drugs and other supplies.

Relevant Range

Most fixed costs don't stay the same over all levels of sales. Nor do most variable costs change given a small change in sales. Costs are defined as fixed or variable only over some defined, relatively restricted range of sales volumes. § Most costs are fixed or variable only over a relatively restrictive range of volumes. Example: Pharmacists Salaries 1) If prescription volume increases from 50 to 75 a day, the pharmacist's salary's is considered to be a fixed cost because the salary expense will remain the same even though prescription volume has increased. 2) If prescription volume increases from 50 to 125 a day, the pharmacist's salary's is considered to be a variable cost since another pharmacist will have to be hired to handle the increased prescription volume.

Gross Margin a.k.a. Gross Profit

Net Sales - COGS · Money that can be used to cover operating expenses and provide a profit · Given the relatively high costs of drugs, and the pressures from consumers to control what they pay for prescriptions, gross margins are under pressure in pharmacies

current portion of long-term debt

Portions of mortgages and bank notes that will be paid in the coming year.

What must not-for-profit organizations do with their profits?

The profits (excess of revenues after expenses) of a not-for-profit organization must be reinvested in the organization and are generally not taxed.

What can for-profit organizations do with their profits?

The profits of a for-profit organization may be spent however the owners see fit and generally are taxed.

Opportunity Cost

The return that could be realized from the best foregone alternative use of a resource. It is usually expressed as the difference in costs between two alternatives (both out of pocket expenses and forgone income). Examples: Going to pharmacy school vs. getting a job

Inventory Turnover

This ratio measures the rate of movement of inventory. It is a function of both sales and purchasing efficiency. This ratio is important to pharmacies since a high portion of their assets (usually > 50%) is inventory.

Primary purpose for for-profit organizations

To provide a financial return on their shareholder's investments.

The balance sheet must always obey the following equation:

Total Assets = Total Liabilities + Net Worth Or Total Assets - Total Liabilities = Net Worth

The biggest operating expenses

Wages and salaries

Liabilities

What is owed by a business to others (creditors).

Quick ratios above 2.0

a sign that a pharmacy might not be allocating its assets efficiently.(too much money invested in current assets)

If current ratio falls below 2.0

a sign that the pharmacy may have trouble paying its debts on time -It is thought to be worse to be too low than too high

When a pharmacy sells a prescription, COGS is the cost of the drug that was used in the prescription. COGS does not include

any of the other expenses necessary to fill a prescription (personnel, supplies, overhead, etc.).

GM% FOR DEEP DISCOUNT/GROCERY STORES

as low as 15%

The most effective way to improve the Quick Ratio

decrease inventory as much as possible without sacrificing sales.

Can a cost be: -a direct cost and a fixed cost? -a direct cost and a variable cost? -an indirect cost and fixed cost? -an indirect cost and a variable cost?

§ Yes! Direct/indirect and fixed/variable are separate concepts! Ie. Shelves and fixtures § Indirect § Fixed

current assets

· Assets that are cash or can quickly be turned into cash. · Assets that will be used up quickly (< 1 year).

fixed assets

· Assets that will not be used up within a one year period. · Assets that will be of use in the long term, not used up immediately.

What kinds of fixed assets lose their value by accelerated depreciation?

· Car · Computer system · Technology

accelerated depreciation

· High amounts in early years, less in later years · $100,000 computer system = $40K year 1 + $30K year 2 + $20K year 3 + $10K year 4

straight line depreciation

· Initial value of asset ¸ # of years asset will be used = $ Depreciation expense each year (see income statement) Example: · Equal every year · $100,000 pharmacy shelves ÷ 10 years of use = $10,000 depreciation expense each year for next 10 years.

Balance Sheet

· Keeps track of what a business owns (assets), what it owes (liabilities), and what the owners have invested in the business (net worth, equity). · Is a snapshot of the financial picture of a business at a specific point in time

Prescription inventory generally achieves more turns than non-prescription inventory. Why?

· Prescription inventory is more expensive, more effort placed on control of this asset · Computerized inventory control systems carefully track prescription inventory. Many are programmed to order only what is needed when it is needed. · Vendors offer "just in time" deliveries, allowing pharmacies to keep inventory levels low but customer service levels high.

operating expenses

· Selling, administrative, and general overhead costs involved in a business's operations throughout the period. · Does not include the costs of drugs or other items that are sold!

intangible assets

· Something of value to a business that is not tangible. · Intangible assets are very hard to place a dollar value on. Many lenders and creditors will not accept intangible assets when applying for loans or credit.

Examples of current assets in pharmacy

Þ Accounts Receivable: money that is owed to the pharmacy by others Þ Inventories (Drugs;Supplies) Þ Cash/Checking/Savings/Stocks/Bonds

A pharmacy bought Vitamin X tablets for $10 a bottle and was planning on selling them for $17 each. The very next day a study was published which doubted the medical benefits of Vitamin X. The market value (what consumers are willing to pay) for these vitamins dropped to $5 a bottle, half of what the pharmacy originally paid for them. In order to maximize their profits, what price should the pharmacy sell them for? § $17 § $12 § $10 § $5

$5

Allocation of rent:

(1) proportion of floor space occupied by Rx dept. to total floor space- fixed cost (2) proportion of Rx sales to total sales- variable cost

Income Statement

(a.k.a. "profit and loss" statement) · Most common financial statement used by pharmacists · Reports on the transactions of a business over a period of time · Includes all sales, purchases and expenses of a business during that time period. · Is always performed at the end of a business's fiscal year. Is usually prepared more often (monthly, daily) for use as a management tool.

examples of long term liabilities in pharmacy

- Bank loans - Mortgages

Examples of For-Profit Organizations in pharmacy

- Community pharmacies - Long-term care & home health care pharmacies - Pharmaceutical Industry - Some hospitals - Specialty pharmacies

Ways to Improve Net Profit

- Decrease operating expenses and cost of goods sold a. $1 ↓ in OE or COGS = $1 ↑ in NP -Increase gross margin ($, %) -Increase sales at a higher rate than your costs increase a. $1 ↑ in sales = < $1 ↑ in NP b. pennies generated c. $1 Increase in sales does not equal $1 in NP

Inventory levels and purchasing practices

- Inventory turnover ratio, days inventory on hand - Purchases made from non-preferred vendors (due to Drug shortages)

Examples of non-for-Profit Organizations in pharmacy

- Most hospitals (major teaching hospitals) - Community health centers - Government health care facilities (VA,IHS) - Most academic institutions (NEU)

Employee hours worked

- Overtime - Wages aren't set at the pharmacy level, but hours worked (and therefore overall wage expenses) are - Increased hours worked (especially overtime) increases overhead expenses

examples of intangible assets in pharmacy

- The value of a brand name - The value of a key employee - The value of your pharmacy education/pharmacist license

Examples of operating expenses in pharmacy

- Wages and salaries - Utilities - Rent/mortgage - Licenses/fees - Insurance - Supplies and equipment - Depreciation (see page 4)

Depreciation

-A method of calculating the expense of an asset over its entire useful life - Generally, only fixed assets are depreciated (Last for a while; Lasts for a number of years) -Items that are typically not sold by a business, but are intended to be used over the long term

Impact on net profit by decreasing costs and expenses

-As long as ¯ costs does not ¯ sales, profits will increase dollar for dollar. -Decreasing certain types of costs may decrease sales Promotions Personnel

Examples of depreciation in pharmacy

-Building -Equipment/supplies

Medicare

-Inpatient Prospective Payment System (Medicare-largest payer) -Diagnosis Related Groups (DRGs) IPPS- inpatient prospective payment system Prospective payment based on admitting diagnosis; Average resources used to treat Medicare patients with that DRGs Adjusted (Area, % of low income, trains pharmacy and medical training_ -payment determined --> hospital provides all care patient need despite how long or how much/how little goods (despite amount of care provided) used to treat patient

indirect costs of dispensing

-Most wage and benefit expenses (Pharmacist also do clinical services and supervise other personnel) -Utilities -Rent -Maintenance and other facility-related costs -Store liability insurance -Promotional expenses (advertising, marketing)

Þ Impact on net profit by increasing sales

-Must cover the costs of increases in sales (COGS, operating expenses). -Profits increase by cents on the dollar.

A community pharmacy is a profit center.

-Pharmacies generate revenue (profit center) -No prospective or capitated payments at this time -Changes brought on by the Affordable Care Act -Fee for service

direct cost of dispensing a prescription

-Prescription drugs, labels and containers, patient education materials, pharmacy license, professional (attending meetings, CE), pharmacy computer, equipment specific to dispensing (e.g., robot) -What about wages and benefits? Direct if do nothing but activity But usually workers have more responsibilities

Why is the GM% of Specialty, consultant, home infusion so high ?

-Service intensive -High overhead expenses

How are cost analyses used?

-Should a pharmacy offer a product or service? § What are the costs? § Will it be profitable? -How should a product or service be priced? § Ideally prices should cover costs -Should a product be outsourced or compounded in house? -Should a 3rd-party contract be accepted? § What impact will accepting a contract have on profits? § Marginal costs

Cost of Goods Sold (COGS)

-The amount of goods (prescription drugs, OTCs, other products) sold in a given period in terms of their cost for the pharmacy to purchase. Beginning Inventory + Purchases - Ending Inventory Cost of Goods Sold (COGS)

net sales

-The true (net) amount of sales that are generated. Total Sales - merchandise returned - allowances given for defective goods and services - deductions from third-party payers - employee or special discounts = Net Sales

sunk cost

An expenditure made in the past that can not be changed.

Why does GM% decrease as the percentage of prescriptions paid by third party payers increased?

-Volume purchases by 3rd parties Monopsony/Oligopoly - few buyers, many sellers "Take it or leave it" contracts -Lack of bargaining power of pharmacies Anti-trust laws keep competing pharmacies from acting together on contracts Chains have more bargaining power than independents

If current ratio is above 5.0

-pharmacy may have too much money invested in current assets -This money could be doing more for the business if it were invested in other areas (i.e., fixed assets, expansion, developing new products and services).

For pharmacies, the quick ratio should be between

1-2

Why use Financial Ratio Analysis in Pharmacy?

1. Financial ratio analysis is a very objective way to assess the financial condition of a pharmacy. 2. Can help pinpoint areas where changes would help bring about improved financial performance. 3. Useful to monitor changes that occur over time (trend analysis). 4. Financial ratios are used to compare pharmacies to each other in terms of financial performance.

Primary purpose for not-for-profit organizations

1. To provide services to a community that may not otherwise obtain them from for-profit organizations. a. Government incentives for not-for-profit status

The goal for ROE for a community pharmacy is at least (blank), with higher levels always being preferred.

10-15%

Cost Allocation

100% allocated to cost of performing the activity

Community pharmacies generally set a goal of attaining a ROA of at least (blank), with higher levels being preferred.

15%

For most pharmacies, the current ratio should be between

2 and 5

net profit percentage in a community pharmacy

2-4%

GM% FOR INDEPENDENT

21%

GM% FOR CHAINS

23-25%

typical independent pharmacy has had a net profit of around

3%

Most community pharmacies try to turn over their entire inventory at least (blank) times a year

5-10

GM% FOR Specialty, consultant, home infusion

50-60%

expense

A specific type of cost that is charged against (deducted from) revenue in an accounting period. Expenses are always included on an income statement, while costs do not have to be included (some are, some aren't). Example: The depreciation expense for the computer system (or any other fixed asset) that shows up on an income statement.

equity advantages/disadvantages

Advantages: No legal obligation to repay investors. Equity allows businesses and individuals to spread the risks of owning a business onto others. Disadvantages: § For-profit investors expect to share in profits § Profits (dividends) paid to investors often more than interest paid on debt § Investors have a right to a voice in the operations of the business

Aiudi's Pharmacy would like to start selling a 30-day supply of any generic medication for $5 a prescription. Assume that their pharmacy's cost of dispensing is consistent with national averages, and that prescription medications account for 90% of the pharmacy's total sales. Given what you know about this pharmacy, which of the following statements is true? Answers: Aiudi's Pharmacy net profit is likely to increase if they adopt this strategy. Aiudi's Pharmacy net profit is more likely to decrease than a pharmacy that has a lower percentage of their total sales coming from prescriptions. Aiudi's Pharmacy will see their net profits increase so long as the cost of goods sold of the drugs in the prescription is less than $5. None of the above (A, B and C are each false)

Aiudi's Pharmacy net profit is more likely to decrease than a pharmacy that has a lower percentage of their total sales coming from prescriptions.

Current Liabilities

Amounts owed at any given time that are due in the short term (one year or less).

long-term liabilities

Amounts that are owed at any given time but are not due within one year

Days Inventory on Hand

Another measure of inventory efficiency, this time measuring the number of days it would take for the pharmacy to sell their entire inventory should no additional purchases be made. All pharmacies (community, hospital, others) would like this number to be as low as possible so long as they do not run out of stock.

Assests

Anything that is owned or controlled by a business that is used to produce income

Money that a business owes to its employees and others for services that have already been provided, but not yet paid for, appears on their balance sheet as a: A. Accounts Payable B. Accrued Debt C. Accounts Receivable D. Retained Earnings

B. Accrued Debt

What could this pharmacy do to improve their Gross Margin Percentage on Prescription Sales? A. Increase their prices, which will always increase their sales B. Purchase all of their drugs from their preferred vendor to decrease their cost of goods sold C. Negotiate a lower monthly rent on their lease D. All of the above

B. Purchase all of their drugs from their preferred vendor to decrease their cost of goods sold

Semi-variable Costs

Costs that include both a fixed and variable component. Even if sales were zero, some of these costs would still be present. Examples -Rent (if it has a fixed and variable component) -Wages of salespeople paid on commission (fixed + % of # of sales)

fixed costs

Costs that stay the same regardless of changes in sales volume. Examples: -Rent (if fixed amount per month) -Depreciation -Property taxes -Licenses and professional fees -Most fixed assets -Some salaries (Pharmacists who are paid a set wage no matter how much or little they work)

Direct Costs

Costs which are 100% attributable to the activity being analyzed. If this activity does not take place, these costs would not be incurred. § Prescription drugs, labels and containers, patient education materials, pharmacy license, professional (attending meetings, CE), pharmacy computer, equipment specific to dispensing (e.g., robot) § COGS is not included! (ie. Drugs)

Net Worth (also referred to as Equity or Owner's Equity)

Net Worth (also referred to as Equity or Owner's Equity)

Can a not-for-profit organization exist without earning a profit on their operations over the long-term?

No! All organizations must bring in more money than they spend in order to remain operating!

Impact of depreciation on cash flow

None - depreciation does not affect how much an asset costs to acquire or when the money needs to be paid.

Decreasing certain types of costs may decrease sales such as

Promotions Personnel

Net Income (net profit, fund balance)=

Sales ($ generated from prescriptions, OTCs, services, etc.) - Expenses (cost of goods sold, operating expenses)

Quick-ratio (also known as Acid test)

Similar to the current ratio, but only considers assets that are cash or could be converted into cash quickly (i.e., accounts receivable). In this case, inventory is not considered to be an asset that can be turned into cash quickly. This ratio is a signal of a pharmacy's ability to pay its bills quickly without having to sell off its inventory.

Tests of Solvency

Solvency ratios describe a firm's overall ability to pay its legal debts over the long term

Capitation (managed care)

Specific rate per member per month

Brian Yu, PharmD, manager of Save-Right Pharmacy, has developed four strategies to improve the net profit of his pharmacy. Which of the following strategies is likely to lead to the largest increase in net profit? Answers: Adding a new prescription drug to increase prescription sales by $10,000. Adding a new non-prescription item to increase non-prescription sales by $10,000. Taking advantage of purchasing discounts to lower cost of goods sold by $10,000. Stop running advertisements in the local newspaper, decreasing promotional expenses by $10,000.

Taking advantage of purchasing discounts to lower cost of goods sold by $10,000.

Ways in which pharmacies can improve their gross margins:

a. Lower cost of goods sold (COGS) i. Take advantage of discounts, preferred vendors b. Price products and services effectively i. Charge the maximum that consumers are willing to pay ii. Charge for professional services! c. Encourage use of generic drugs when appropriate i. Improves GM $ & % ii. Decreases inventory investment d. Accept only favorable 3rd party (managed care) contracts § Know cost of dispensing, marginal costs § Estimate impact contracts have on profits § Don't accept contracts that decrease profits!

Quick ratios below 1.0 are seen by creditor's as

danger signs of not being able to pay current liabilities in the future.(sign of trouble paying bills quickly). -It is thought to be worse to be too low than too high.

As the percentage of prescriptions paid for by third-party payers has increased, the gross margin percentage for pharmacies (especially on prescription items) has increased or decreased?

decreased

Pharmacies that have higher amounts of sales can have relatively low gross margin percentages and still generate a higher amount of gross margin dollars than other types of pharmacies. examples?

deep discount

Net Income Before Income Taxes (Net Profit Before Income Taxes, Net Operating Income)

gross margin-operating expenses

ROA can be improved by

increasing net profits or decreasing assets.

Lenders prefer that pharmacies have low or high solvency ratios

low

Return on Assets

measures how effectively all funds available to the manager, both debt and equity, are being used.

Gross Margin Percentage

measures the profitability of a business before operating expenses are paid.

Accounts Receivable

money that is owed to the pharmacy by others

Cost of providing a service differences

o Costs are allocated and calculated as before Depreciation? No longer apart of facility related cost; that depreciation was not included since equipment and materials are considered a direct cost! § Promotional? NOW DIRECT COST

How can pharmacies offer $4 generics? Free antibiotics?

o Offered by pharmacies at discount and grocery stores o Not common at chains/ independents o Prescriptions account for much lower % of total sales § GS (5-10%); chain (60-75%), indep (80-95%) o Generics: Loss leader pricing § Prices items low (below cost) to draw customers to purchase other items in other areas to make up for loss. § Why? Have other things they want to sell

A hospital pharmacy department is a cost center.

o Pharmacists contribute to profitability by providing goods and services that improve the quality of care, get patients out of the hospital sooner, and keep costs down o The roles of pharmacists in hospitals have increased in the era of cost containment o Generates cost w/o generating revenue

High ITO is a sign of efficient use of assets, which leads to higher return on equity & return on assets (profits). Disadvantages ?

patient may need drug and don't have it; not taking good care of patient

Calculating cost of dispense requires a

pro forma income statment why? The pro forma income statement for the future period of interest (next month, next year, etc.) should be used when calculating COD & CPS. Using a past income statement (last month, last year, etc.) will probably underestimate the COD & CPS. (Why?) o Cost changes over time

cost of dispensing

the average per-prescription expense a pharmacy incurs in operating the prescription department, and is calculated in community, hospital and most other pharmacy settings. This method of analysis can also be applied to help managers determine what the costs of compounding a prescription are, dispensing a prescription, or what costs are associated with providing professional services to patients.

marginal costs

the costs to produce additional units (e.g., prescriptions, patient visits).

While pharmacies must have enough cash to purchase a depreciable fixed asset up front, the depreciation expense related to that asset shows up on

the income statement each year of the life of that asset.

If a pharmacy is already operating at it's maximum capacity (dispensing as many prescriptions or seeing as many patients as they can with their current personnel and facilities),

the marginal costs of dispensing additional prescriptions or providing more services will be equal to or higher than the costs calculated using the methods described earlier. § Direct costs of producing additional units + Indirect variable costs of additional units This is because additional personnel and facilities will need to be acquired to offer these products and services.

If the revenue brought in from providing the additional units is greater than the marginal cost of producing them,

the net profit of the pharmacy will increase.

If the inventory turnover ratio is low it means

too much money invested to inventory

%GM of sales prescription are usually lower than %GM for nonprescription (t/f)

true

A typical community pharmacy carries over $300,000 in inventory at any given time, most of it (~$250,000) being prescription drugs. (t/f)

true

All expenses are costs, but not all costs are expenses. (t/f)

true

Chains have more bargaining power than independents (t/f)

true

For-profit organizations pay income taxes on "the net income before income taxes." What is left after taxes is spent at the discretion of the owners (reinvested, dividends, spent by owner) (t/f)

true

If a pharmacy is not at maximum capacity, the salary and facility-related costs are not part of the marginal costs, since a pharmacy would not have to increase these expenses to offer these additional units of production. (t/f)

true

Managers usually don't wish to see the values for solvency ratios increase over time. (t/f)

true

Many pharmacies accept managed care contracts that pay them less than their costs of dispensing or providing a service. (t/f)

true

Marginal costs will increase if additional personnel need to be hired, if current personnel have to be paid more (overtime, incentives), or if more physical facilities and equipment need to be acquired/built/maintained in order to provide a service. (t/f)

true

Most government or charity-owned health facilities are not-for-profit (t/f)

true

No pharmacy has infinite capacity! (t/f)

true

Not-for-profit organizations may call net income the "fund balance". While these fund balances are not taxed, they must be reinvested back into the organization. (t/f)

true

Regardless of the gross margin percentage, what ultimately is important is that the gross margin dollars a pharmacy generates are high enough to cover their expenses and provide an adequate profit. (t/f)

true

higher gross margin percentages are always desirable. (t/f)

true

most pharmacies aren't operating at their maximum capacity (t/f)

true Why? Pharmacies usually do not have to hire more personnel or acquire additional facilities to fill a few more prescriptions or provide services to a few more patients (see Relevant Range)

Return on Equity (also referred to as "Return on Investment" (ROI) or "Net Profit to Net Worth")

used to examine how effectively the funds invested in the firm by its owners are being used.

Can a particular cost be either a direct or indirect cost?

yes § Example: Salary of a hospital RPh who provides a antibiotic stewardship service § If RPh only provides the AB service, then the salary is a direct cost to the AB service § If RPh also provides additional services unrelated to the AB service (e.g. dispensing), then the salary is an indirect cost to the AB service.

Risks of financial leverage

§ Debts must be paid back, often with interest § Too much debt can lead to financial problems

Benefits of financial leverage:

§ Purchase needed assets before you have the cash § Keep more cash on hand for other uses

Daily and weekly prescription counts

§ Used to monitor net sales § Also used to justify operational expenses (personnel, equipment)

examples of current liabilities in pharmacy

Þ Accounts Payable: Money that is owed by a pharmacy to others, usually for drugs and other supplies. Þ Accrued Debts: Money a pharmacy owes to its employees and others for services that have already been provided, but not yet paid for. Þ Current portion of Long-term Debt: Portions of mortgages and bank notes that will be paid in the coming year. Þ Line of credit from a bank or vendor

How can Inventory Turnover and Days Inventory on Hand be improved?

Þ Decrease amount and dollar value of inventory kept on hand o But be careful not to run out of items your patients need Þ Carry only the items your patients need and use Þ Have expensive items on hand only when you know you will need them o Example: specialty pharmacy drugs Þ Train your patients and staff to anticipate needs for expensive items o Have patients call a few days in advance before they refill a very expensive medication

examples of fixed assets in pharmacy

Þ Equipment Þ Furniture/fixtures Þ Computer hardware/software Þ Buildings, land