Understanding your Income Statement
Part 5 – Net Income
As an independent pharmacy owner, you may be in business for multiple reasons – perhaps the most significant one is to generate income. While an accountant may manage the bulk of your books, business decisions ultimately rest with you. That’s why an understanding of your pharmacy’s key financials can help.
Knowledge is power – the more informed you are about your pharmacy’s financials, the better the business decisions you can make. Here, we wrap up the breakdown of your income statement by examining Net Income.
What it is
Net Income (also called Net Profit) is your pharmacy’s earnings. The “bottom line” on your Income Statement is the profit (Net Income) or loss (Net Loss) made after Revenue is adjusted for all of the expenses incurred while doing business.
Gross Profit, on the other hand, is the amount of money that remains after Revenue (or Sales) is adjusted for Cost of Goods Sold (COGS). Then, from Gross Profit, Operating Expenses are subtracted, resulting in our Net Income.
Revenue – COGS = Gross Profit – Operating Expenses = Net Income
The goal of your pharmacy is to drive a higher Net Income. This can be done by increasing Revenue, decreasing Cost of Goods Sold, and reducing Operating Expenses.
Why it’s important
Your pharmacy must make a profit in order to stay in business. What’s more, your business is in the business of care. When you turn a profit, you not only remain in business, you also continue to care for your customers.
Additionally, Net Profit is a key indicator of your business’ fiscal health. When you seek business financing, lenders will analyze your financial records, including your Income Statement. As a gauge of how profitable your pharmacy is, Net Income will factor into a lender’s decision of whether or not to grant you that loan.
Since generating Net Profit begins with Revenue/Sales, your goal is to produce more revenue. You can do this by increasing sales volume and by increasing sales quality. The latter entails finding niche areas where you may be able to sell products with higher profit margins. It may seem daunting but if you invest the time to discover new markets and/or areas with greater profitability you’ll be rewarded.
Ways to improve it:
As mentioned earlier, you can increase Net Profit by increasing sales and decreasing COGS and Operating Expenses. Here are some strategies to consider:
- Increase sales volume – strive to fill more scripts.
- Maintain proper pricing – ensure you maximize reimbursements.
- Quality vs. quantity – sell products with a higher Profit Margin. Understand the difference in brands vs. generics prescriptions. Focus on non-prescription sales.
- Manage all of your inventory, especially prescription drugs – ensure you don’t sit on inventory and have the products you need, when you need them.
- Purchase properly from your suppliers.
- Promotions – offer weekly sales or other discounts to get more customers through your doors.
- Expand your product lines – variety can increase your customer base.
- Reduce overhead – ensure you are staffed properly and lower your costs of operational items such as supplies, utilities, et al.
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.