The Importance of Understanding Your Pharmacy Financials

Published by James Scurr on

The Importance of Understanding Your Pharmacy Financials

As in any small business, there are a lot of tasks to juggle behind the scenes for pharmacy owners. One of the most daunting aspects of business ownership can be managing the finances, particularly if your background is in pharmacy rather than entrepreneurship. Gaining a comprehensive understanding of your businesses financial position allows you to make educated decisions in regards to the growth of your pharmacy.

A great place to begin is to look deeper than just how much money is coming in vs. coming out, there are some basic financial statements which provide some valuable insight into how your business is performing. The Balance Sheet, Income Statement and Statement of Cash Flows can provide you with an overview of your pharmacies position.

The Balance Sheet

The Balance Sheet details your assets, liabilities and equity at a specific pint in time. This statement is based upon the accounting equation, assets equals liabilities and equity, which allows you to evaluate your liquidity and debt commitments.

The Income Statement

This is often considered the most important financial statement as it shows a businesses financial performance. Also known as a Profit and Loss statement, this document explores incoming revenue and outgoing expenses to determine profitability over a period of time.

Statement of Cash Flows

 This statement allows business owners to understand the sources of cash or cash equivalents flowing into and leaving their business. The Cash Flow Statement is complimentary to The Balance Sheet and Income Statement and gives insight as to whether a business is on solid financial footing.

In addition to financial statements, there are some basic KPI’s which can help you evaluate more specific areas of your business.

Payroll Ratio

For small businesses, your payroll ratio is a great way to measure productivity and is important as labour is a significant business expense. Pharmacy Development Services report that the goal ratio of pharmacies is less an 13.6%, a higher ratio could be an indication of overstaffing or under performance.

Inventory Turnover

This ratio is a great tool to evaluate how often your pharmacy is selling and replacing inventory over a particular period and can be calculated by division cost of goods sold by inventory. A higher turnover is generally positive, as a lower turnover suggests your business could have too much money tied up in poorly selling stock.

If you are unsure about where to start, talking to a financial advisor or accountant is a great first step. They will be able to assist in generating any financial documents you require and providing some insightful advice based upon what they find.