Manage Finances Like a

Pro
NP by Nivedita Parulekar
Why Financial Management is Critical for
Pharmacies
Bottom Line Success
Long-term success and
profitability.
Smart financial decisions
impact all business decisions.
Cost Savings &
Efficiencies
Recognizing where costs
can be cut without
diminishing service can
improve your pharmacy's
bottom line, while providing
excellent patient care.
Regulatory
Compliance
Maintaining strict compliance
ensures that you're following
industry-wide regulations
and accounting standards.
Finance
Management of money, assets, investments, and financial resources within an organization. It deals with
the acquisition, allocation, and utilization of funds to achieve specific goals and objectives.

Financial Markets
The platforms where
individuals, businesses, and
governments can buy or sell
financial instruments, such as
stocks, bonds, and
currencies.
Investment
The allocation of resources
to different assets or projects
with the expectation of
generating future returns.

Finance Financial Risk Management

Management
planning, organizing,
directing, and controlling an
organization's financial
resources to achieve its
objectives efficiently and
effectively.
Instruments identifying, assessing, and
Tradable assets that mitigating financial risks to
represent a claim on an minimize potential losses.
entity, such as stocks,
bonds, derivatives, and
commodities.
Analyzing Financial Statements in
Pharma
Cash Flow Statements
The movement of rupee in both in and
out of the business.
Regularly monitoring cash flow ensures
that the pharma company always has
the funds on hand necessary maintain
business activities.
1 Profit and Loss Statements
Monitoring revenue, expenses, and
profits for the pharmacy
2 Identify trends in the business and
provides insights to make smart
decisions.
3 Balance Sheets
Show the pharmacy's total assets and
liabilities.
Give stakeholders a picture of the
pharma's financial health which helps
make strategic business decisions.
Understanding Balance Sheet
A balance sheet provides a snapshot of a company's financial position at a specific point in time. It consists
of three main sections: assets, liabilities, and equity.
Assets = Liabilities + Equity
Assets: These represent what the company owns. In the context of a pharmaceutical company, assets
might include:
Current Assets: Cash, accounts receivable (money owed by customers), inventory (drugs ready for
sale).
Non-Current Assets: Property, plant, and equipment (laboratories, manufacturing facilities), intangible
assets (patents for drugs).
Liabilities: These represent what the company owes to others. For a pharmaceutical company, liabilities
can include:
Current Liabilities: Accounts payable (money owed to suppliers), short-term debt.
Non-Current Liabilities: Long-term debt, deferred tax liabilities.
Equity: This represents the shareholders' ownership interest in the company.
This balance sheet shows $1.5 billion in assets, $900 million in liabilities, and $600 million in shareholders'
equity.
Income Statements (Profit and Loss
Statements)
summary of a company's revenues, expenses, and profitability over a specific period, typically a quarter or a
year. It helps investors and analysts understand how much money the company made and how much it
spent during that period.
Company generated $1.2 billion in revenue, incurred $400 million in COGS, resulting in a gross profit of
$800 million. After deducting operating expenses, interest, and taxes, the company had a net income of
$105 million for the year.
Cash Flow Statement
Provides information about a company's cash inflows and outflows over a specific period, categorizing
them into three main sections: operating activities, investing activities, and financing activities.

This cash flow statement shows that company generated $135 million in cash from its core operating
activities. After accounting for investments and financing activities, the company had a net increase of $45
million in cash for the year.
These financial statements provide valuable insights into a pharmaceutical company's financial
health, its ability to generate profits, manage its assets and liabilities, and its cash flow
management, all of which are critical in the pharmaceutical industry's competitive and regulated
environment.
Accrual Accounting
Records financial transactions when they are incurred or earned, regardless of when the actual cash
exchange occurs. It focuses on matching revenues with expenses in the period in which they are
recognized, providing a more accurate picture of a company's financial performance.
Key characteristics of accrual accounting:
1. Recognition of Revenues: Revenue is recorded when it is earned, typically when goods or services are
delivered to customers, and there is an expectation of payment. This means revenue can be recognized
even if cash hasn't been received yet.
2. Recognition of Expenses: Expenses are recorded when they are incurred, not when they are paid. For
example, if a pharmaceutical company incurs research and development (R&D) expenses for drug
development, those expenses are recognized as they are incurred, even if the actual payment to
suppliers or employees occurs later.
3. Matching Principle: Revenues and expenses are matched to the accounting period in which they
contribute to the generation of records transactions only when cash changes hands. It's a simpler
method but may not provide a true reflection of a company's financial performance since it doesn't
account for amounts that are owed or due but not yet paid.me. This helps provide a more accurate
representation of a company's profitability.
Cash Accounting
Records transactions only when cash changes hands. It's a simpler method but may not provide a true
reflection of a company's financial performance since it doesn't account for amounts that are owed or due
but not yet paid.
Importance of Accurate Recording (GAAP
Compliance)
1. Informed Decision-Making: Accurate financial records provide management with reliable information
for making strategic decisions. This helps in allocating resources effectively, planning for the future, and
identifying areas where cost savings can be realized.
2. Investor and Creditor Confidence: External stakeholders, such as investors and creditors, rely on
accurate financial statements to assess a company's financial health and make investment or lending
decisions. Inaccurate records can erode trust and confidence.
3. Tax Compliance: Tax authorities often require businesses to use accrual accounting for tax reporting
purposes, especially for larger companies. Accurate accounting ensures compliance with tax laws and
regulations.
4. GAAP Compliance: Generally Accepted Accounting Principles (GAAP) are a set of accounting
standards and principles that guide financial reporting in the United States. Accurate recording is
essential for GAAP compliance, as these standards emphasize the importance of fair and accurate
financial reporting.
Challenges in Pharma
The pharmaceutical industry faces unique challenges that impact its accounting practices:
a. Drug Development Costs:
Lengthy and expensive process.
High costs associated with research and development (R&D), clinical trials, and regulatory compliance
Accurate Accounting is challenging, considering the uncertainty of success and the need to capitalize
some costs while expensing others.
Example: A pharmaceutical company may need to allocate R&D expenses across multiple accounting
periods, making it necessary to carefully assess when certain development costs should be capitalized and
when they should be expensed.
b. Regulatory Compliance:
Compliance with regulations requires meticulous record-keeping and adherence to specific accounting
standards for items like drug approval costs, quality control, and manufacturing processes.
Example: A pharmaceutical company must maintain detailed records of all activities related to drug
development, including clinical trial expenses, quality control expenses, and regulatory filing costs, while
ensuring these expenses are correctly classified in accordance with accounting standard
C. Revenue Recognition:
a. Milestone-Based Revenue Recognition: Pharmaceutical companies typically recognize revenue when
specific milestones in the drug development process are achieved. These milestones can include regulatory
approvals, successful clinical trial results, or product launches.
Example: Revenue recognition can be complex in cases where a pharmaceutical company receives upfront
payments or royalties based on future milestones. Deciding when to recognize revenue related to these
milestones requires careful evaluation of contractual terms and progress toward achieving the milestones.
D. Patented Drugs and Generic Competition: The expiration of patents for blockbuster drugs can
significantly impact revenue. When patents expire, generic competitors can enter the market, leading to a
sharp decline in revenue for the original pharmaceutical company.
Example: Pharmaceutical companies must plan for revenue decreases when patents are set to expire and
adjust their financial forecasts and strategies accordingly.
Costing Analysis Methods in Pharma
Inventory Valuation (FIFO, Costing Methods (Job
LIFO) Order, Process, ABC)
Choose and understand these Different costing methods exist
inventory costing methods to for different pharmaceutical
make the best business activities. Discover which
decisions. Watch for unique method is appropriate for you
challenges in a changing market. based on a solid understanding
of your business.
Activity Based Costing Direct Vs Indirect Costing Cost Allocation
(ABC) Direct cost : cost of raw material
Activity Identification Indirect cost : Factory rent
Resource allocation
Direct costs are variable, directly
Cost Drivers attributable to a specific product
or activity, while indirect costs
are fixed, incurred to support the
organization as a whole.
Budgeting & Forecasting
Use budgeting and forecasting
to help you plan effectively for
the future. Thus, the key
elements of sound financial
management are regular
monitoring and proactive
strategic decision making.
Distributing indirect costs
(overhead) to specific cost
centers, projects, products, or
activities. It is done to determine
the true cost of each cost object.
Cost Controlling
1 Reduce 2 Cost
Waste Reduction
Monitoring & Process
Analysis Optimization
Resource Supplier Negotiation
Optimization Energy Efficiency
Impact on Pharma Marketing
ROI PLC
Marketing budget allocation Product Launch
Measuring Marketing effectiveness Market Withdawal

Pricing Strategies Regulatory Cost

Drug prices Adv. & Promotion regulations
Market Competition Legal Cost
Profit Margin
Financial Risk and Financial
Mitigation Strategies
1 Diversification: Spreading risk by having a diversified
product portfolio, entering multiple markets, and
sourcing from multiple suppliers.
Hedging: Using financial instruments like currency hedges to
mitigate exchange rate risk.
Quality Assurance: Implementing rigorous quality control and
assurance measures to prevent product recalls.
Legal Compliance: Ensuring compliance with regulatory
requirements and maintaining robust legal and risk management
practices.
Insurance: Purchasing appropriate insurance coverage, such as
product liability insurance, to mitigate financial losses from
unforeseen events.
Financial Planning: Conducting thorough financial planning,
including scenario analysis and stress testing, to prepare for
potential financial risks.
Investment Decisions
Evaluating and selecting long-term projects or assets that are expected to generate financial returns over
an extended period.
Research and development (R&D) projects, manufacturing facilities, acquisitions, and other strategic
investments.
Key Aspects of Investment Decisions:
Risk Assessment: Evaluating the likelihood of success for a new drug candidate or the potential
impact of regulatory changes.
Financial Analysis: To estimate the expected cash flows, costs, and revenues associated with the
investment. This includes assessing the net present value (NPV), internal rate of return (IRR), and
payback period.
Strategic Alignment: Ensuring that the investment aligns with the company's strategic goals and
long-term objectives. e.g. evaluating how a new drug fits into the product portfolio.
Resource Allocation: Considering the allocation of financial resources, talent, and time to the
investment project. Balancing investments across different projects and areas is crucial for optimal
resource utilization.
Capital Budgeting
Project Evaluation: Evaluating the feasibility and profitability of potential investments. Common
methods include NPV (Net Present Value), IRR, and payback period analysis.
Risk Assessment: Identifying and quantifying risks associated with the capital project, such as market
uncertainties, technology risks, and regulatory challenges.
Cost-Benefit Analysis: Comparing the expected benefits and costs of the project over its entire life
cycle. This analysis helps determine whether the project is financially justifiable.
New Drug Development Projects
Market Potential: Evaluating the market potential for the new drug, including the target patient
population, pricing, competition, and market size.
Research Costs: Estimating the costs associated with pre-clinical research, clinical trials, regulatory
approvals, and post-approval monitoring.
Revenue Forecasting: Projecting future revenues based on expected sales volumes, pricing, and
market acceptance.
Regulatory Compliance: Assessing the regulatory pathway and requirements for drug approval, which
can impact the timeline and costs.
Risk Analysis: Identifying risks such as clinical trial failures, unexpected side effects, or market
competition and assessing their potential impact on the project's financial outcomes.
Summing Up the Role of Financial
Management in Pharmacy
A Clear Path for Long-
Term Success
Good financial management
promotes profitability,
enables smarter decision-
making, streamlined
workflows- all of which
drives long-term success in
pharmacy businesses.
A Better
Understanding of
Risks
Good financial management
helps to identify and
minimize financial risk. Proper
understanding leads to
better financial risk
mitigation, which can
maintain profitability of your
company.
Improved Pharmacies
Market Position
Knowing how to cost-
effectively get and keep your
pharmacy's business
operations running- without
sacrificing quality of service-
keeps costs low, increases
profits, and puts your
business in a prime position
to be the leaders in the
market.