Refer to the proposal to add a retail pharmacy mini-case study

Identify how many of the assumption items listed in the example for this week can be found in the retail pharmacy proposal worksheets.

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Mini-Case Study 1: Proposal to Add a Retail Pharmacy to a Hospital in the Metropolis Health System

Sample General Hospital belongs to the Metropolis Health System. The new chief financial officer (CFO) at Sample Hospital has been attempting to find new sources of badly needed revenue for the facility. Consequently, the CFO is preparing a proposal to add a retail pharmacy within the hospital itself. If the proposal is accepted, this would generate a new revenue stream. The CFO has prepared four exhibits, all of which appear at the end of this case study. Exhibit 291, a three-year retail pharmacy profitability analysis, is the primary document. It is supported by Exhibit 292, the retail pharmacy proposal assumptions. The profitability analysis is further supported by Exhibit 293, a year 1 monthly income statement detail. Finally, Exhibit 294 presents the supporting year 1 monthly cash flow detail and assumptions.

When the controller reviewed the exhibits, she asked how the working capital of $49,789 was derived. The CFO explained that it represents 3 months of departmental expense. He also explained that the cost of drugs purchased for the first 60 days was offset by these purchases accounts payable cycle, so the net effect was 0. In essence, the vendors were financing the drug purchases. Thus, the working capital reconciled as follows:

Working Capital:
Cost of drugs (2 months)	$303,400
Vendor financing (accounts payable)	($303,400)
Departmental expense (3 months)	$49,789
Total Working Capital Required	$49,789

The controller also noticed on Exhibit 294 that the cost of renovations to the building is estimated at $80,000 and equipment purchases are estimated at $50,000 for a total capital expenditure of $130,000. The building renovations are depreciated on a straight-line basis over a useful life of 15 years, whereas the equipment purchases are depreciated on a straight-line basis over a useful life of 5 years. The required capital is proposed to be obtained from hospital sources, and no borrowing would be necessary. In addition, the total capital expenditure is projected to be retrieved through operating cash flows before the end of year 1.

Exhibit 291 Sample General Hospital 3-Year Retail Pharmacy Profitability Analysis

		Year 1	Year 2	Year 3
Rx Sales		2,587,613	2,692,152	2,828,375
Cost of Goods Sold		2,047,950	2,088,909	2,151,576
Gross Margin		539,663	603,243	676,799
GM %		20.9%	22.4%	23.9%
EXPENSES
Salaries and Wages		192,000	197,760	203,693
Benefits		38,400	39,552	40,739
Materials and Supplies		12,000	14,400	17,280
Contract Services and Fees		14,400	17,280	20,736
Depreciation and Amortization		15,333	15,333	15,333
Interest
Provision for Bad Debts		25,876	26,922	28,284
Misc. Exp.		3,600	4,320	5,184
Total Expense		301,609	315,567	331,248
Net Income		238,053	287,676	345,550
Operating Margin		9.2%	10.7%	12.2%
	Cash Flow
		Year 1	Year 2	Year 3
Sources
Net Income		238,053	287,676	345,550
Depreciation		15,333	15,333	15,333
Borrowing
Total Sources		253,386	303,010	360,884
Uses
Capital Purchasing		130,000
Working Capital		49,789
Total Uses		179,789
Cash at Beginning of Period			73,597	376,607
Net Cash Activities		73,597	303,010	360,884
Cash at Ending of Period		73,597	376,607	737,490
	Volume
		Year 1	Year 2	Year 3
Number of Prescriptions Sold		55,350	56,457	58,151

Courtesy of Resource Group, Ltd., Dallas, Texas.

Exhibit 292 Sample General Hospital Retail Pharmacy Proposal Assumptions

			Prescriptions
1.	Annual Prescription EstimatesRate of Growth/Capture		Per Day	Annual
	Year 1		225	55,350
	Year 2	2.0%	230	56,457
	Year 3	3.0%	236	58,151
2.	Average Net Revenue per PrescriptionYearly Increases
	Year 1			$ 46.75
	Year 2	2.0%		$ 47.69
	Year 3	2.0%		$ 48.64
3.	Bad Debt Percentage	1.0%
4.	Average Cost per PrescriptionYearly Increases
	Year 1			$ 37.00
	Year 2	3.0%		$ 38.11
	Year 3	3.0%		$ 39.25
5.	Inflation RatesPer Year
	Salary and Wages			3.0%
	Other Than Prescriptions			2.0%
	Benefits as a % of Salaries			20.0%
6.	Initial Capital Requirements
	Building			80,000
	Equipment			50,000
	Working Capital			49,789
	Total			179,789
		Year 1	Year 2	Year 3
	Gross Margin	539,663	603,243	676,799
	Net Income before Taxes	238,053	287,676	345,550
		Year 1	Year 2	Year 3
	Beginning Cash Balance		73,597	376,607
	Net Cash Activity	73,597	303,010	360,884
	Ending Cash Balance	73,597	376,607	737,490

Courtesy of Resource Group, Ltd., Dallas, Texas.

Exhibit 293 Sample General Hospital Retail Pharmacy Proposal Year 1 Monthly Income Statement Detail

Exhibit 294 Sample General Hospital Retail Pharmacy Proposal Year 1 Monthly Cash Flow Detail and Assumptions

So how was the proposal received by the hospitals board of trustees? They first asked for a small market study to test the amount of prescription sales projected within the proposal. When the market study results came back positive, the board approved the project, and renovations are about to commence.

Example 23A: Assumptions

Types of assumptions required for the financial portion of a business plan typically include answers to the following questions:

Example of Typical Income Statement Assumption Information Requirements:

What types of revenue?

How many services will be offered to produce the revenue? (by month)

How much labor will be required? (FTEs)

What will the labor cost?

How many and what type of supplies, drugs and/or devices will be required to offer the service?

What will the supplies, drugs and/or devices cost?

How much space will be required?

What will the required space occupancy cost?

Please do it in Excel

Is special equipment required?

If so, how much will it cost?

Is staff training required to use the special equipment?

If so, how much time is required, and what will it cost?