Understanding Your Income Statement
Part 4 – Operating Expenses
Having a solid understanding of your independent pharmacy’s financials can spell the difference between your business’ success and failure. While you may have an accountant whom you trust to prepare your financials, having a grasp of your pharmacy’s financials can aid in better business decisions, day-in and day-out.
Remember the formula:
Revenue – Cost of Goods Sold = Gross Profit – Operating Expenses = Net Profit
Since the goal for any business is to boost its bottom line (or Net Profit), keeping your controlled expenses in check is key. Those expenses impact your business’ cash flow, so monitoring them is imperative. Here, we continue our Income Statement series by exploring Operating Expenses.Revenue - Cost of Goods Sold = Gross Profit – Operating Expenses = Net Profit Click To Tweet
What it is
Essentially, Operating Expenses are the expenditures that your business incurs while conducting its business operations. This includes rent, employee salaries and benefits, utilities, computers and other workplace equipment, marketing, office supplies, bank fees, and more.
However, inventory is not an Operating Expense. Inventory, or the merchandise that you purchase for resale, is a Cost of Goods Sold. For example, the cost of the prescriptions that you buy from a supplier (to then resell to your customers) is a Cost of Goods Sold (COGS). Therefore, the general rule is this: if an expense is not related to COGS, it’s considered an Operating Expense.Operating Expenses are the costs your business incurs while conducting its #bizoperations Click To Tweet
Why it’s important
It is crucial to optimize expenses to be as lean as possible without the potential of impacting the customer experience.
It’s safe to say that you want to increase the cash flow of your independent pharmacy. One way to achieve this is by monitoring, and ultimately reducing, your pharmacy’s Operating Expenses. However, this can be a Catch-22. Lower some areas of Operating Expenses too much and you run the risk of affecting your business’ ability to compete in the marketplace.It's crucial to optimize expenses to be as lean as possible w/o impacting customer experience Click To Tweet
To that end, you want to keep Operating Expenses as low as possible but not to the detriment of your business. For example, let’s say that your pharmacy is known for providing exceptional customer service. This may be what sets you apart from the big box-type pharmacies – providing your edge over the local competition. Now assume you consider reducing the number of technicians as a means of cutting expenses. While this option may be feasible on a slower weekday, it may not be a wise strategy to employ on a busier day, such as Monday or the first of the month. This may lead to your Pharmacist having to perform more functions usually handled by that technician. As a result, it may cause longer check-out times for customers who count on fast and friendly service in your store – causing them to take their business elsewhere.
Again, strive to reduce Operating Expenses, but not at the risk of watering down your business. It may take some time to determine the right balance, but the investment will be worth the it.
Ways to improve it
It is possible to strike and maintain the proper balance in your Operating Expenses. Various strategies exist to lower your Operating Expenses, which in turn increases your Net Profit. Here are some options to consider:
- Prepare a budget to measure and monitor all of your operational expenses. You’ll establish a benchmark and easily identify areas of cost-cutting opportunities.
- Ensure you are staffed properly. Labor costs are usually the largest expense in the pharmacy. Understanding how much labor is necessary can save significant labor costs.
- Cut the cost of supplies where possible; they are necessary costs to the business but generally do not affect the customer.
- Go Green – energy-efficient technology reduces energy costs.
- Always monitor lease/rental agreements and other contracts to ensure they are within market ranges. Review and discuss contracts at least annually and discuss money saving options.
- Reduce your utility bills. Small changes like turning off computers after hours, installing timers on lights, and replacing your old thermostat with a programmable one, can lighten the load on your electric bill.
Part IV of Understanding Pharmacy Financials is OUT! Read about Operation Expenses here Click To Tweet
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.