10/18/19
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Cash Flow, Inventory, and Your Financial Health
Ollin Sykes, CPA, CTIP, CMA Scott Sykes, CPA Sykes & Company, P.A.
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Disclosures
There are no relevant financial relationships with ACCME- defined commercial interests for anyone who was in control of the content of the activity.
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Pharmacist and Pharmacy Technician Learning Objectives • List nine best practices for managing community pharmacy operations • Discuss strategies for managing inventory effectively • Describe key financial indicators and benchmarks for your own business
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Current Industry Trends
• Tighter reimbursements • Lower margins in some cases • Increased DIR/GER/BER fees • Tighter cash flow • USP <800> • Track and Trace • Third-Party reconciliation • Inventory management
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#1 – Fundamentals: Introduction
• Foundation of all businesses • Pharmacy industry inherently requires strong fundamentals • Poor foundation limits analysis and understanding • Lack of controls make fraud easier to perpetrate
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#1 – Fundamentals: Introduction (continued)
• Does not allow for proactive management • Poor fundamentals cost owner time and money • Utilize technology • Back office should be streamlined and efficient • Allows for pharmacy owner to focus on growth and patient care
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#1 – Fundamentals: Daily Processes
• Fundamentals include: • Daily/Weekly processes • Point of Sale • Reconciliations • Payroll • Accounts Payable
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#1 – Fundamentals: Balance Sheet
• Balance Sheet is a snapshot in time • Assets = Liabilities + Equity • Assets: • Cash, 3rd Party Receivables, Inventory, Fixed Assets, etc. • Liabilities: • Accounts Payable, Notes Payable, Sales Tax Payable, etc. • Equity: • Retained Earnings, Distributions/Draws
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#1 – Fundamentals: Profit & Loss
• Displays profit or loss for a period Revenues - Cost of Goods Sold Gross Margin - Expenses Net Income
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#2 – Know Your 3rd Party Receivables
• Adjudicate a script - money is owed to the pharmacy from PBM payors • Money owed to the pharmacy is an asset • This asset increases your revenues and provides an accurate picture of gross revenues
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#2 – Know Your 3rd Party Receivables
• The biggest unreconciled bank account in a pharmacy • Fill and hope is not a fundamental business strategy • Utilize technology and manage • Quickly identify errors and issues with payors • It’s your money!
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#2 – Know Your 3rd Party Receivables
• Provides additional data you can analyze to maximize your cash flow and margin • DIR/GER/BER fee reporting • Average AR days outstanding – 19 – 22 days • Do you know what is owed to you at any given moment? • Do you know if you are getting reimbursed for what you adjudicate?
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#2 – Know Your 3rd Party Receivables
• Necessary to understand the financial picture of your pharmacy • Allows pharmacy owner to understand payer trends
• Catches errors with reimbursements • Captures DIR fees and other adjudication costs
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#2 – Know Your 3rd Party Receivables
• Best Practices for Reconciliation
o Manual reconciliation is time consuming and increases payroll costs
o Manual reconciliation is not necessary and inefficient o Utilize technology resources in the marketplace
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#2 – Know Your 3rd Party Receivables
• Best Practices for Reconciliation – continued
o Technology captures the information in real time o Does require uploads of 835 files or EOB’s for some payers o Management of the system is required to ensure integrity
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#2 – Know Your 3rd Party Receivables Aged Receivables Snapshot – Healthy (Page 1)
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#2 – Know Your 3rd Party Receivables Aged Receivables Snapshot – Healthy (Page 2)
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#2 – Know Your 3rd Party Receivables Aged Receivables Snapshot – Unhealthy (Page 1)
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#2 – Know Your 3rd Party Receivables Aged Receivables Snapshot – Unhealthy (Page 2)
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#2 – Know Your 3rd Party Receivables Adjustment Payment Level Detail Report
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#2 – Know Your 3rd Party Receivables Aetna DIR Report (Page 1)
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#2 – Know Your 3rd Party Receivables Aetna DIR Report (Page 2)
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#2 – Know Your 3rd Party Receivables Daily Dash
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#3 – Inventory Management
• Vital component of financial statements • Guessing is not a business strategy
• $100 bills on the shelf • Inaccuracies will impact your financial statements, analysis and advisory • Poor management will crush cash flow
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#3 – Inventory Management
• Poor management may increase tax liabilities
• Synchronization! • High performing pharmacies take inventory seriously • Technology continues to improve
• Emphasis on inventory management is, and will continue to be, a trend in the coming years
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#3 – Inventory Management
• Inventory Turn = Cost of Goods Sold / Average Inventory • Demand shifts daily/constantly
• Next day ordering, let wholesaler carry cost/risk • Inventory management is a process • Explore automation
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#3 – Inventory Management – Track & Trace
• Drug Supply Chain Security Act • Enacted to further secure drug supply • Trace drug unit through supply chain • Must confirm the entities you do business with are licensed and registered • Must implement protocols and processes for identifying suspect and illegitimate products
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#3 – Inventory Management – Track & Trace
• Receive, store, and provide product tracing documentation including transaction information, history and statement
• Intercompany transfers or transfers with other pharmacies must be considered
• Begin inquiring trading partners on how these compliance issues will impact their pharmacy • Ultimate impact on pharmacies and inventory management
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#3 – Inventory Management – Physical Counts
• Annual physical counts in the 3rd or early 4th quarter • Two physical counts if more data points are needed • Use to adjust books and records to actual • Utilize for proactive tax planning • Companies in the market that specialize in pharmacy inventory
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#3 – Inventory Management – Perpetual
• Pharmacies today must utilize, change required • Nearly impossible to maximize net profit without • Scheduled periodic cycle counts • Technology to analyze your Rx data • Carefully craft reorder points to maximize cash flow
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#3 – Inventory Management – Perpetual
• Package size analysis and economies of scale
• Synchronization!! • Scheduled returns • Monthly accounting adjustments, real-time margin, and enhanced financial advisory • Accurate cost downloads are necessary (EDI)
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#4 – Cost of Goods Sold/Margin
• Biggest expense in a pharmacy • Accurate inventory adjustments are vital • Any inaccuracies will impact margin and net income • Average retail 2019 gross margin approximately 23%
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#4 – Cost of Goods Sold/Margin
• Revenue diversification and specialization to enhance margin • DIR fee impacts to gross margin and profit and loss statement • Are you maximizing behind the bench adjudication
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#5 – Payroll
• Payroll inherently complex • Look to technology and outsourcing • Second biggest expense for a pharmacy • Average is 10.5% of total revenue • Under 10% of total revenues ideal
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#5 – Payroll
• Simple analysis of your operating hours may provide opportunity to cut costs dramatically • Should owners adjust their salaries for tax purposes? • How do owner salaries impact retirement planning?
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#6 – DIR/GER/BER/ER Fees
• DIR fees continue to trend higher • Know what your fees are as a % of revenue • Know your star ratings • Average 1.8% - 4%+ • Understand your accounting • Utilize technology to capture
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#7 – Key Performance Indicators
• Current Ratio • Current Ratio = Current Assets / Current Liabilities • 2.5 / 1 – Average • < 2.0 / 1 – Red Flag • > 2.5 / 1 – Good, higher the better
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#7 – Key Performance Indicators
• Equity to Assets • Equity Ratio = Total Equity / Total Assets • 10-20% for newer pharmacies • 50% + for mature pharmacies • Great indicator of balance sheet strength
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#7 – Key Performance Indicators
•Inventory Turnover • Inv. Turnover = COGS / Avg. Inventory • Typical industry average is 12 turns a year • Higher the better. Explains how well you manage inventory
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#7 – Key Performance Indicators
•Others • Gross Margin – 23% • AR Days – 19 • Payroll % of Rev. – 10.5% • Overhead % – 6-8% • Net Income – 4-7%
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#8 – Accrual and Cash Accounting
• Generally, pharmacies were required to report on the accrual basis of accounting for tax purposes • TCJA expanded the use of the cash method of accounting for tax reporting
• Many pharmacies incorrectly reported cash basis for tax and therefore not eligible to take advantage
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#8 – Accrual and Cash Accounting
• Major planning area with TCJA of 2017 • Fundamental change in tax reporting for pharmacies • Taxpayer friendly • Will impact financial reporting • A change likely to increase expenses and reduce taxable income • Optional for pharmacies
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#8 – Accrual and Cash Accounting
• Eligible pharmacies include those with average gross receipts for prior three years less than < $25 million • Controlled groups of pharmacies must be taken into consideration for gross receipts test • Treatment of inventory has not been clarified by the IRS as there are conflicting opinions on how inventory should be handled
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#8 – Accrual and Cash Accounting
• Form 3115 Change in Accounting Method required • 481(a) adjustment can be taken in year of change if negative (expense)
• If positive (income), 481(a) adjustment can be taken in year 1 if under $50,000 or over a four-year period
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#8 – Accrual and Cash Accounting
• Know the limitations before making a change! • Expiration of the TCJA in 2025 and potentially converting back to accrual • Basis limitations for pass-through entitles (S Corp, Partnerships, LLC) • Financial reporting limitations • Already cash basis = no benefits
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#9 – Tax Planning
• Utilize fundamental accounting system to plan for taxes • Proactive not reactive • No surprises • Adds control to your financial future and allows pharmacy owner to plan for cash flow requirements • Act now, not 2020!
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#9 – Tax Planning
• Depreciation • Cost Segregation • Buying/Selling Considerations • Charity Planning • Section 199A Deduction • Retirement Planning • Accrual to Cash Planning
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#10 – Bonus: Top Tier Pharmacies
• Characteristics include: • Diversified revenues including clinical services, higher margins • Embrace change as opportunities • Utilize real-time accounting system as an asset • Proactive advisory and tax planning • Maximum use of technology inside pharmacy • Clean store front and healthy OTC area
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Walkaways
• Setup the fundamentals • Understand your numbers monthly • Maximize how well you buy and manage inventory • Control payroll
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Walkaways - continued
• Plan for taxes to improve cash flow • Diversify revenues • Look alive in your pharmacy • Be an entrepreneurial pharmacy owner
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Questions?
Ollin B. Sykes, CPA.CITP, CMA Direct: 252.632.0012 Email: [email protected] Twitter: @OllinSykes
Scotty Sykes, CPA Direct: 252.632.0012 Email: [email protected] Twitter: @ScottySykesCPA
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