Managing your business through financial reviews
By Derek Desrosiers, BSc(Pharm), RPh
Recently, I was having a conversation with a pharmacist business owner about financial aspects of the business, discussing various business environmental factors and how they may affect profitability. When I asked him how his own business was faring, given updates such as the pan-Canadian Pricing Alliance agreement, I was flabbergasted when he admitted it wasn’t until his accountant reviewed his records at the end of each year whether he had made a profit.
Operating a business without regular ongoing monitoring of financial performance is akin to jumping off a cliff without knowing how far the drop and how the deep the water is, or even if there is any water there at all. While some pharmacies do seem to fall under the category of what I like to call “successful in spite of themselves” – profitable because of being in the right place at the right time – it’s imperative that pharmacy business owners operate with sound fiscal management.
There is a lot of information available on how to read financial statements and other factors that your financial manager will want to monitor, but in an effort to keep things simple for the purposes of this article let’s focus on three important documents: profit and loss (P&L) statement (also known as income statement), balance sheet, and cash flow statement.
The P&L statement is a snapshot in time that summarizes the revenues, costs, and expenses incurred during a specific time (usually a fiscal quarter or year). You use this document to learn from and inform the changes you want to make to your business, as you want your next statement to look better than the one you are currently reviewing. Compare your current P&L to a previous one: Look at sales figures, the gross margin and gross profit dollars. Analyze why any difference exists and if it is worse, what you can do to correct it. Maybe it comes down to marketing or other environmental factors like generic price decreases. Finally, compare your operating expenses. See where you have saved money or could save money and make necessary changes to improve the picture.
Like the P&L, the balance sheet is also a historical document, but it also provides additional information that gives a view of your business’ sustainability. The first section of the balance sheet is the assets, which are divided into two sections – current and long-term. Current are the things that you anticipate will be changed into cash within the next year, such as inventory and receivables. Long-term assets are things like leasehold improvements, fixtures and computers. The next section is liabilities, which follows a similar definition of current and long-term. Things you anticipate paying in the next year are current liabilities (e.g. loan principal payments for the next 12 months) and other debts such as loan principal payments to be made after the next 12 months will be long-term. The final section of the balance sheet is shareholder equity, which includes the initial capital you put into the business when you purchased it and any retained earnings from previous years. The assets = liabilities + owner’s equity. So, the larger the owner’s equity, the stronger the business is likely to be, because the liabilities constitute a smaller percentage.
The cash flow statement may be the most important of the three documents we have discussed yet many businesses do not utilize this important tool. It illustrates the future of the business and the ability of the business to meet its financial obligations over the next year. For example, foreseeing a cash flow shortage 10 months ahead allows you to make changes to things like operating expenses and inventory to avoid the potential shortfall. You create the cash flow statement by starting with a budget, which requires some estimation, so your cash flow statement is only as accurate as your ability to estimate things like sales.
The bottom line is that you really need to know, understand and use your numbers to manage your business well. Staying on top of them puts you in a better position to anticipate and meet your customers’ needs while at the same time managing the welfare of the business.
Derek Desrosiers, BSc(Pharm), RPEBC, RPh is President and Principal Consultant at Desson Consulting Ltd.