Financial ratiosObjective  Understand the basic Financial Ratios  Be able to use financial data to calculate various ratios  Understand how to use these ratios in making assessments and decisions in business  Understand the basics of BudgetingFinancial Ratios  Profitability Ratios The way to measure the success of a company  Liquidity Ratios Information on the ability to meet short-term financial obligations  Turnover Ratios Efficiency with which a company uses its assetsProfitability Ratios  Gross Profit Margin Gross Profit Margin=(Sales-Cost of Goods Sold)÷Total Sales “Ability to generate profits…”Profitability Ratios  Gross Profit Margin Why is Cost of Goods Sold (COGS) Important? Cost of Drugs Inventory-Balance Sheet item at a given time COGS-Income Statement item “The ability to generate gross profits”Profitability Ratios  Net Profit Margin Net Profit Margin=Net Income (after taxes)÷Total Sales “Fraction of net profit that is generated for every dollar of sales…”  Great comparison tool for measuring how well operating expenses are being managedProfitability Ratios  Return on Assets Return on Assets=Net Income ÷ Average Total Sales “Ability to generate profits using assets”Profitability Ratios  Return on Equity (Return on Investment) Return on Equity=Net income ÷Average Owner’s Equity “How well the can make profits from funds provided by owners or investors”Liquidity Ratios  Current Ratio Current ratio=Current Assets ÷ Current Liabilities This is a measure of the ability to pay off “short-term” debt A ration of 2:1 is considered good for most industriesLiquidity Ratios  Quick Ratio (also called Acid Test Ratio) Quick Ratio=(Current Assets-Inventories-Prepaid Expenses)÷Current Liabilities This ratio really only looks at the most liquid of the current assets to determine ability to reduce short term debt quicklyTurnover Ratios  Inventory Turnover Ratio Inventory Turnover Ratio=COGS ÷ Average Inventory The Turnover Ratios measure the efficiency of using the assetsTurnover Ratios Examples:  High ratios  Low ratiosTurnover Ratios  Receivables Turnover ratio Receivables Turnover Ratio= Credit Sales ÷ Average Accounts Receivables How quickly receivables are turned into cashTurnover Ratios Examples:  Third party receivables  Store accounts  Co-pays and deductiblesBudgeting Budgets are usually operational (short-term) plans concerning sales and profit forecasts within the next year. Three types of budgets commonly used in Pharmacy:  Cash Budget  Operating Budget  Capital BudgetBudgeting Cash Budget This is a schedule of cash receipts and disbursements reflecting a pharmacy’s projected cash inflows and outflowsBudgeting Operating Budget Presents anticipated revenues and expensesBudgeting Capital Budget Looks at possible investment in fixed assets Examples:  Hospital  Long-Term care 