Understanding Your Pharmacy Income Statement

As an independent pharmacy owner, you likely wear many hats. With the number of responsibilities in your day, you may wonder why adding “accountant” to the list is necessary. However, understanding your income statement can help you more effectively manage your business, make more informed business decisions, and foster increased profits.

In this three-part series, we’ll break down the key components of your income statement, which ultimately impact your business’ bottom line. From enabling you to identify areas of opportunity to uncovering issues before they become problematic, garnering a basic understanding of your pharmacy financials can aid in boosting your profits – and therefore, your success.

What is an Income Statement?

An income statement is a monthly, quarterly, or annual summary of the business’ revenues and expenses to review the cash flow and profitability of the business.  

The flow of an income statement (which is often referred to as a “Profit & Loss” or “P&L”) should follow a consistent format to allow a business owner the ability to review and monitor the financial performance of the pharmacy.  

The format should be as follows:
Revenues (series part 1)
Cost of Goods Sold (series part 1)
= Gross Profit (series part 2)
Expenses (series part 2)
= Net Profit (series part 3)

A successful pharmacy owner is an aware business owner. While you may prefer to leave the number-crunching to your accountant, understanding your pharmacy’s financials enables you to make better business decisions.

When you’re cognizant of the amount of money coming in – and going out – of your business, you have a better idea of your pharmacy’s overall financial health. With that, you’re ahead of the curve, no accounting degree needed.

Here, we begin our Income Statement series by exploring revenue.

Revenue and What It Means:

Revenue – Cost of Goods Sold = Gross Profit
– Operating Expenses = Net Profit

While each component on your income statement is equally important, revenue is where it all begins. revenue is the income, or sales, that your pharmacy brings in, during a period of time. Not to be confused with profit (more on that later in the series). revenue is adjusted for discounts and deductions (for example, wholesaler rebates, returned merchandise, etc.). It’s the “top line” item of your income statement from which expenses are subtracted.

To determine revenue, calculate the number of an item sold by the unit price. If you sold 20 bottles of multi-vitamins at $10 per bottle, then your revenue is $200. (For ease, let’s say that none of the bottles/units were returned, so that no adjustments are necessary.)

Why it’s Important

Without revenue there can be no net profit, or bottom line. A business must bring in money to continue to make money.

In pharmacy, revenue (sales) can be made up of prescriptions (traditional, compounded, long-term care, specialty, etc.), over-the-counter, durable medical equipment, and other niche market products such as immunizations.  

In most pharmacies, third-party insurance (non-cash) prescriptions make up the majority of sales; therefore, it is important to monitor and manage the reimbursements from third-party payers to ensure proper revenues. It is important to remember, “Reimbursement = Revenue!”

Therefore, the focus should be on increasing revenue (sales) and decreasing cost of goods sold. This nets a higher gross profit which, in turn, covers your operating expenses (see the Operating Expenses segment of our series). The latter includes salaries, rent, office supplies, and the like.

Ways to Increase it

Increases in revenue can mean increases in profit. While sales may not jump overnight, there’s a range of smart tactics to give them a lift.

Here are some strategies to consider:

Diversify: offer a variety of products and essentials for purchase, in addition to prescriptions.
Offer other services: providing immunizations or flu shots can bring more customers through your doors.
Use it or lose it: the technology included with dispensing software and Point-of-Sale (POS) can help you ensure proper product pricing.
Monitor reimbursements: ensure that you’re properly compensated for dispensed scripts.
Suggest add-ons: your pharmacy staff can advise customers of supplements and the like that alleviate side-effects caused by some medications.

Cost of Goods Sold: What it is

In a retail business, such as your independent pharmacy, cost of goods sold is simply the cost of the merchandise (or inventory) that you buy from a supplier, which you then resell to your customers. COGS does not include operational expenses, such as labor, utilities, rent, salaries, and other overhead.

Delving a little deeper, cost of goods sold is treated as an expense, which is deducted from your revenue (or sales) to determine gross profit (more on the latter can be found in Part 3 of this series.)

Why it’s Important

When you properly manage your cost of goods sold, you maintain greater control of your pricing strategy as it relates to prescription revenues (i.e. proper reimbursements and cash pricing), as well as, non-prescription products such as OTC, DME, etc.

Revenue – COGS = Gross Profit.

Therefore, by properly pricing the items that your pharmacy sells, you can generate more revenue.

Typically, the two largest inventory items purchased by a pharmacy will be brand and generic pharmaceuticals. Depending upon the pharmacy’s product mix, it may need to purchase items with a higher cost (brand or specialty items) or items with a lower cost such as generics. In either case, it is important to understand how these items are priced to ensure you make the proper revenues on these items.   

Additionally, increasing or decreasing your COGS will impact your gross profit. With your inventory costs (or COGS) decreased, your gross profit will likely increase; conversely, when your inventory costs increase, you will decrease gross profit.

Proper inventory management is a key component to maintaining a realistic COGS.

Ways to Improve it

Since your inventory is likely the largest expense in the pharmacy, it’s wise to explore ways to lower its cost to you. To that end, accurate inventory management is crucial – as is knowing when and how to buy product. Opportunities exist to lower your COGS.

Here are some strategies to consider:

-Pricing: Understand and discuss pricing regularly with your primary and secondary suppliers to ensure your pricing is competitive.
-Maintain proper inventory accounting principles: use just-in-time (JIT) inventory to your advantage and prevent dollars from sitting on your pharmacy shelf. Monitor your inventory turns with regards to your fast and slow-moving items.
-Ensure inventory control: put proper procedures in place to reduce product shrinkage/loss.
-Purchase wisely: take advantage of additional incentives offered by your suppliers (examples may include: payment terms, trade shows, bulk order discounts, etc).

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Stay tuned for part two of a three-part series which will cover accounting principles of Revenue, Cost of Goods Sold, Gross Profit, Operating Expenses and Net Profit.