admin exam 1 - financial man. Flashcards
Accounting
A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions
Provides the framework for critical decision-making processes essential for the success of any organization
Tracks the flow of money (cash or credit) between financing and investing activities - tracks flow of what is coming in and what is going out
Determines profitability, future growth, and tax liability
Accounting
Assets = owner’s equity + liabilities
Assets are things that a business owns that can be used to generate income
Obtaining the money needed to acquire an asset requires financing
Liabilities are money owed to others
Owner’s equity is the owner’s own funds
3 Fundamental activities of accounting in pharmacy
Obtaining financing
Making investments
Conducting a profitable operation
Obtaining financing (to acquire assets)
Necessary in any business
Involves obtaining funds from business owners as well as creditors
Owners who fund the activities of a corporation are the shareholders
Shareholders have a claim on the company’s assets and their investment results in either regular distributions from the company (dividends) or an increase in the value of the company’s total assets leading to a profitable operation
Creditors provide funds but require the company to repay the funds with interest over a specified period of time
Conducting a profitable operation
Involves
- Obtaining financing
- Investing funds to acquire needed assets
- Operational activities, purchasing, drug distribution, clinical activities and administration
- May also include marketing
What is a fiscal year?
A unit of time that businesses use to record their financial interactions
Can start on January 1 or any other date and end 1 year later
Many businesses do not use January 1
- Why? In small groups come up with a couple of reasons why a business would choose a different fiscal year cycle
why would January 1 not be a good fiscal year? you would be wrapping up business during the holiday because, between October 31 and December 31st, not a lot goes on so people may not be as available to do business
3 essential financial statements
Table 21-1
Balance sheet
Income statement
Statement of cash flow
The balance sheet
Provides a snapshot of an organization’s assets, liabilities, and shareholder equity at a particular point in time.
Does not reveal much about what caused these values to be what they are or to change over the course of time
Does not tell how income was generated and what types of expenses were incurred during the accounting period
The income statement
A dynamic document that provides information about money coming into an organization (income) and money necessary to generate that income (expenses)
Connects the beginning and ending balance sheets in any given period of time by providing the details of operating activities such as sales and expenses
The difference between income and expenses is net income, net profit, or earnings
Statement of cash flow
Connects the beginning and ending balance sheets by indicating the impact of the company’s investments, financing, and operations on cash flows
Records the inflow and outflow of cash or money
Typically separates values into three categories: operating, investing, and financing
Linking the financial statements
The last line in the statement of cash flow indicates the amount of cash available at the end of a fiscal year
The last line in the statement of cash flow is always the same as the amount of cash recorded on the balance sheet for the beginning of the following fiscal year
The reports are fluid and are linked to each other
Financial ratios (Table 21-6)
Profitability ratios
Liquidity ratios
Turnover ratios
Allow users of financial information to make comparisons between
- A single organization and the entire industry average
- Differences within an organization over time
- Two or more units within a single organization (pharmacies within the same chain)
- Two or more organizations with each other (comparisons between chain pharmacy corporations)
Profitability ratios
Measures overall success in the daily operations of a business since profit is the goal
Gross profit margin = (sales – cost of goods sold) / total sales – do not need to know but know how it works
Provides information on the company’s ability to generate gross profits
Higher gross profit margin ratios indicate the availability of funds for the company’s other expenses so higher ratios are most desirable
Profitability ratios
Net profit margin = net income(after taxes) / total sales
Indicates the fraction of net profit that is generated for every dollar of sales
Liquidity ratios
Provide information on the business’s ability to meet its short-term financial obligations
The current ratio is the ratio of the current assets to current liabilities
Current ratio = current assets / current liabilities
An organization with a high current ratio is taking fewer risks in meeting financial obligations
Liquidity ratios
The quick ratio that an organization strives to obtain is 1.0
A quick ratio greater than 1.0 means that the organization has more quick assets than current liabilities.
Having a quick ratio of less than 1.0 means that the cash that the organization has on hand is not sufficient to pay all its current liabilities
Quick ratio = (current assets – inventory – prepaid expenses) / current liabilities
Turnover ratios
Measures the efficiency with which an organization uses its assets
Also referred to as efficiency ratios or asset utilization ratios
The two most commonly used are inventory turnover and receivables turnover
Inventory turnover ratio = cost of goods sold/average inventory (at cost)
Inventory turnover ratio
Measures how quickly, on average, an organization’s inventory is sold
Low inventory ratios indicate that the organizations inventory is too large for its operations and that cash could be better spent elsewhere that is tied up in inventory
High inventory ratios are desirable and mean that the organization is able to sell and replace its inventory efficiently and therefore generate higher revenues and profits
Financial reports in community pharmacy practice
Financial ratios
Balance sheet
Income statement
Include Third-party plan payer reports
Evaluate assets, liabilities, income, cost of sales, general and administrative expenses, net income
Financial reports in hospital pharmacy practice
Different than those used in community pharmacy
Consist primarily of information on inventory costs and labor costs
- Fluctuations in inventory costs
- FTEs and labor costs (overtime avoidance)
Part of a global hospital budget
Also, look at
- Patient days
- Case mix index
- Drug cost per patient day
- Labor cost per patient day
What is a budget?
A detailed plan expressed in quantitative terms
Specifies how resources will be acquired and used during a specified period of time
Budgeting systems
The procedures used to develop a budget constitute a budgeting system
Budgeting systems have five primary purposes
- Planning
- Facilitating communication and coordination
- Allocating resources
- Controlling profit and operations
- Evaluating performance and providing incentives
Types of budgets
Master budget (ties together all phases of a pharmacy’s operation)
Budgeted financial statements (Pro forma financial statements)
Capital budget
Financial budget
Short-range budget
Long-range budget
Rolling budget (revolving or continuous)
Operational budget
Master budget components
See table 22-1 in text
Understand the schedules used to construct a master budget (Sales/Operational/Budgeted Financial Statements)
- Sales of services or goods
- Inventory
- Materials
- Labor
- Overhead
- Administration
Assumptions and predictions in budgeting
What assumptions do you think are necessary for budgeting?
- need as much money as last year
What predictions do you think are necessary for budgeting?
Budget administration
The pharmacy manager
- Responsible for preparing/proposing the budget
- Responsible for meeting the approved budget
Often the proposed budget is not what is approved and what you have to work with
Budget cycles are fiscal years and then broken down into smaller time periods (month/week)
Budgets should be shared with staff or include staff in preparation to increase understanding, buy-in, and support
Budget administration
Budgets should be re-visited at staff meetings and during one-on-one discussions with staff
The pharmacy manager may delegate responsibility for line-items in the budget to managers of record, supervisors and staff
The behavioral impact of budgets
The budget affects everyone in the organization
Staff and managers affect the success of the budget (meeting the budget) in what they do every day
What are some of the behaviors in community pharmacies that affect the budget daily?
What are some of the behaviors in institutional pharmacy practice that affect the budget daily?
Behavioral impact of budgets
Budgetary Slack: Padding the Budget
Examples:
Regional community pharmacy manager under-estimating the anticipated level of sales
Over-estimation of human resource costs
Behavioral impact of budgets
Why would a manager pad the budget with budgetary slack?
- Their performance may be viewed more positively if they “beat the budget” (save money)
- Padding can be used to account for unforeseen events during the budget cycle
—-Necessary purchase of capital equipment
—-Overtime costs to cover open shifts or fluctuations in business
Behavioral impact of budgets
Padding the budget:
Is it ethical?
Does it happen routinely?
Participative budgeting
Employees throughout the organization are involved in the budgetary process
Gives employees a sense of ownership of the budget
Can lengthen the process and cause delays
The manager needs to be diligent in addressing un-realistic expectations and padding
Costs of poor financial behaviors on budgets and employers
What are some behaviors that could negatively impact the budget in community pharmacy
What are some behaviors that could negatively impact the budget in hospital pharmacy
The financial planning process
Determine current financial situation
Develop financial goals
Identify alternative courses of action
Evaluate alternatives
Create and implement a financial action plan
Re-evaluate and revise the plan
Another example of continuous quality improvement
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