Question
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
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?
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