Page 39 - Retail Pharmacy Magazine October 2020

• • • • Price disclosure forcing the retail price of some items downwards. Certain scripts having a very high price and very low profit margin. Competition for OTC items resulting in discounting. Low inflation rates generally. Thus, the simple approach of tracking Case study In our simple case study, this community pharmacy is predicting annual sales of $2.8 million and earning a GPM of $925,000 per annum. From this margin, the largest expenses to be paid are staff wages, rent for the premises, and interest on bank loans. Other, smaller expenses include electricity, insurances, telephone/ IT, etc., requiring a further $80,000. Total overhead expenses amount to $600,000. The difference between the GPM and total expenses provides a healthy net profit surplus of $325,000 per annum (before income tax). However, this particular pharmacy was acquired only a few years ago, and still has a significant debt owing to the bank, which needs to be repaid. Next year, the amount of principal reduction to be repaid (on top of the interest expenses) is almost $120,000. The estimated income tax on the net profit is forecast to be around $100,000. After deducting all the overhead expenses from the GPM, then allowing for the capital payments to financiers and tax, the surplus available profit remaining for the owner to live on is about $105,000 per annum. If you think of the GPM as a pie, by the time you slice it into the various components in this case study, the owner retains only around 11 per cent of the total GPM, or less than four per cent of total revenue. From this amount they need to pay their own personal living expenses (food, clothing, personal rent/mortgage, school fees, entertainment, etc.). For a pharmacist with a young family, there may not be much of a buffer of surplus cashflow available after the GPM pie has been carved. Even if your business is very profitable, respect your cashflow effectively. There are numerous cases where profitable businesses fail, so avoid being complacent. And if you’re about to buy your first pharmacy, ensure you carefully embrace both profitability and cashflow budgeting. sales trends over a period isn’t always a reliable indicator of performance. Instead, the primary fundamental should be gross profit margin (GPM). This is a critical concept, but not every pharmacist grasps its true importance. With the increased pressures on the bottom lines of our pharmacies over the past few years, the profession has had to become more resourceful. We need to adapt, change and learn to focus on issues that are the most important. GPM is calculated by subtracting the cost of goods sold (COGS) from total sales revenue. COGS is essentially the amounts paid to suppliers for stock, after allowing for any discounts or rebates, and ignoring GST. COGS doesn’t include rent, wages, interest, insurance, etc., which are commonly referred to as overheads or indirect costs. Business owners should then consider how that profit margin is applied to meet overhead expenses in their business. Whatever surplus remains after paying for those overheads is the owner’s net profit. BUSINESS THROUGH INNOVATION FINANCE 37 ETHE GROSS PROFIT MARGIN PIE very business needs to be mindful of its bottom line. Unless you make a profit, your business isn’t sustainable and ultimately something has to give. Large corporations often have enormous financial reserves so they can support the losses of a business venture in the short term. While this can’t last forever, it’s a luxury that small businesses such as pharmacies generally don’t have. There have been fundamental changes in the way retail pharmacies perform, in part due to the effect of: Gross profit margin pie % Total sales % GPM Sales 2,800,000 100.0% - Less: COGS 1,875,000 GPM 925,000 33.0% 100.0% Less: overhead expenses Interest 100,000 3.6% 10.8% Rent 150,000 5.4% 16.2% Wages - staff 270,000 9.6% 29.2% Other 80,000 2.9% 8.6% Total overheads 600,000 21.4% 64.9% Net profit before tax, capital repayment 325,000 11.6% 35.1% Less: bank debt reductions 120,000 4.3% 13.0% Income tax 100,000 3.6% 10.8% Surplus for personal expenses 105,000 3.8% 11.4% By Neil Featherstone. Director Pinn Deavin Neil Featherstone is a director of Pinn Deavin, a leading accounting, management consulting and investment firm. Neil has been advising pharmacists since 1984. Inquiries: neil@pinndeavin.com.au or 02 8525 3700. Accountants specialising in Pharmacy www.pinndeavin.com.au Neil Featherstone (02)85253700 Neil Featherstone 30x190.indd 1 2019-1-11_PinnDeavin_StripAd_Proof.indd 1 19/1/05 8:38:24 AM RETAIL PHARMACY • OCT 2020 11/1/19 1:26 pm