Understanding Pharmacy Financials III: Gross Profit

Understanding your Income Statement

Part 3 – Gross Profit

As we continue this five-part series, we’ll break down Gross Profit, a key component of your Income Statement that ultimately impacts your business’ bottom line. As discussed in Parts 1 and 2 of the series, Gross Profit is directly affected by how well you manage your Revenues and Cost of Goods Sold.

What it means

Gross Profit = Revenue (or Sales) – Cost of Goods Sold

Gross profit is the monetary amount that remains after selling a product and deducting the costs associated with that product. It stands to reason that by regularly monitoring your Revenue and Cost of Goods Sold, you can increase your Gross Profit. It’s important to note that Operating Expenses do NOT impact Gross Profit. Therefore, expenses such as employee salaries, rent/lease, utilities, advertising, etc. do not affect Gross Profit (more on the concept of Operating Expenses later in the series). Rather, Gross Profit is the starting point of how much cash you have to cover those Operational Expenses.

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Why it’s important

Cash flow is an essential component to your business. When you’re aware of your pharmacy’s Gross Profit, you’re aware of your accessible resources (i.e. cash) available to operate your business. Your Gross Profit funds your operations and business growth. Understanding Gross Profit allows you to manage expenses and allocate capital appropriately within the business. Gross Profit is a good indicator of the health of your business and how effectively it’s run. While Gross Profit dollars are the most important, you should also review it as a percentage of Revenues, known as Gross Margin. Gross Margin is calculated by dividing Gross Profit into the Revenues.

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Here’s an example: A customer of your pharmacy buys a bottle of fish oil capsules for $15. Your Cost of Goods Sold is $10 per bottle. Therefore the $15 sale minus the $10 Cost of Goods Sold equals $5 Gross Profit, or ~33% Gross Margin. If you’re not monitoring your basic pharmacy financials, you may not properly price the products that you sell to maximize your Gross Profit. To that end, if you sold that same bottle of fish oil for $12 revenue, minus $10 Cost of Goods Sold, that leaves you $2 in Gross Profit or ~16.5% Gross Margin. That’s $5 in the first scenario versus $2 in the second scenario that you’d have to cover your staff’s pay, equipment costs, taxes, and the like. Again, the higher your Gross Profit, the more funds you have available to grow your business.

Ways to increase it

Need new strategies to increase your Gross Profit? Find them here on Part III of Pharmacy Financials Click To Tweet

There’s a variety of ways to increase your Gross Profit, including managing inventory and increasing sales. After all, there are more items for customers to buy in your independent pharmacy than just prescriptions. Here are some strategies to consider:

  • Manage prescription cash pricing and third party reimbursements to ensure the pharmacy is reimbursed the proper amounts.
  • Properly manage all of your inventory, especially your prescription drugs, through inventory controls such as perpetual inventory management, just-in-time inventory, and/or electronic interfaces.
  • Ensure you maximize your buy plan(s) through your suppliers to attain the best cost of your inventory.
  • Entertain pharmacy-specific niche markets such as compounding, home-healthcare equipment (DME), immunizations, etc.
  • Promote the non-Rx departments, such as over-the-counter (OTC) items, to increase traffic resulting in increased sales.

 

This post is one of a five-part series in understanding your Income Statement. The series breaks down the accounting principles of Revenue, Cost of Goods Sold, Gross Profit, Operating Expenses, and Net Profit, to help independent pharmacy owners make more informed business decisions.