A budget is telling your money where to go instead of wondering where it went - Dave Ramsey
July has finally arrived which means the new beginnings of another financial year. One of my favourite things to do with a business around this time is to prepare an annual budget for the next financial year. We get to review the past year’s performance to see goals we have achieved, what worked and what didn’t work for the business and discuss challenges and opportunities that are occurring in the business. Particularly with 60 Day Dispensing impacting pharmacies in the 2024 financial year, it is vital pharmacies must have a good understanding of their profitability and cashflow and understand what measure they need to introduce to mitigate the impacts. It’s a great time to reflect and set goals for the business to focus on for the next year and to recharge the energy to regain momentum again.
When it comes to the financial wellbeing of your pharmacy, it can be an overwhelming process. The most common thought processes of a business owner when it comes to budgets are:
1) I don’t need to budget and I’m pretty switched on what’s happening in my pharmacy.
2) I don’t have time to do this and we’ll just wing it. If we encounter any issues, let’s solve it when it comes up.
3) I want to do a budget but I’m not sure how to go about it or what I should be looking at.
What I can tell you is that no matter what mindset you have, there is always time and a need for a budget as it will provide focus to stabilise and help your pharmacy grow. I’ll answer the most common questions that I come across when preparing a budget for pharmacies.
What is a budget?
A budget is a financial document that is prepared to estimate the income and expenses of a business for a certain period in the future. It is an important tool to a pharmacy owner as it aids in the financial stability of the business.
When should I prepare a budget?
Having a budget is better than having no budget at all so I encourage you to prepare one when you can. You can start preparing your budgets for the next financial year from June but I find most pharmacies will finalise their budgets around August.
So why is budgeting important?
The purpose of a budget helps you achieve the following items to help stabilise and control profitability, cashflow and overall financial performance data including the following:
· Reviewing revenue trends and working out estimated sales in retail and dispensary.
· Reviewing other incomes and providing estimates (i.e. Pharmacy Programs, Traineeship Incentives, etc.)
· A tool to track spending. You want to make sure you are not overspending money you don’t have and address any bad spending habits.
· Making sure you are paying your suppliers on time.
· Building cashflow.
All these items will allow you to review year to date performance to see if you are on track or off track when comparing actual performance to your budget. Identifying any issues earlier will allow you to pivot and make changes faster to avoid any negative financial impacts in the long term.
What other important items should I be looking at when preparing 2024 budgets?
Some items that I have come across that needs to be addressed on an owner level include the following:
· Conversations that working partners are paid an appropriate wage for their working contribution.
· Are the drawings taken out to partner percentage holdings and does the business have the cashflow to support these drawings levels. In partnership scenario’s most of the time drawings are taken out to service loan and interest repayments for their purchase into the business.
· Review anticipated loan and interest repayments if there is one in the business.
· Partners have spoken to their respective accountants to ensure payments made to partners from the business are tax effective. Also any discussions with your business accountant for any tax implications relating to the business (income tax, payroll tax, fringe benefits tax, tax deductions, Division 7A loans, issuing dividends, etc).
· Discussions regarding life insurance covers for succession planning.
· Any large purchases requiring financing and plans for when this will occur (i.e. Fitouts and plant and equipment and how it is tax effective).
· Understand the impacts 60 Day dispensing will have at various stages in the coming year?
· Understand the impacts of any mitigation measures will have on profitability and cashflow
· What the cashflow outcome is likely to be for the financial year.
How do I estimate revenue and expenses in my annual budget?
The first step is using last financial year’s actual data as a starting point. From here you can choose the following methods:
· Review and remove any one off, non-recurring abnormal items (i.e. RATs incentives, one off purchases) in the last financial year that will not be relevant for the upcoming year.
· Update to reflect anticipated charges. If you are aware of costs and trend changes, reflect this so your budget is realistic as possible (i.e. changes to superannuation rates). Reach out to suppliers who charge fixed monthly expenses to confirm costs.
· Use a percentage change from the prior year to see whether sales or expenses will be up or down for that particular income/expense, at the very least to reflect inflationary changes in your expenses
You will be surprised that your accounting software will have majority of the information that you need so utilise this. You just need some time to sit down and reflect on this.
Are there any other tools in budgeting that can help grow my pharmacy business?
60 day dispensing is going to be disruptive to pharmacy so if you want to be one step ahead, I would highly recommend going through the business data in order to see what changes you can make and just do a financial check in. Some items you can review include:
· Review trends in your departmental sales report to set stock ordering budgets. You may be surprised to see what trends your customers are spending in store and get an idea of what your community needs.
· Review subscriptions and expenses to see if you can negotiate fees, switch providers or see what items bring value to your business.
· Discussions with your landlords for rent review negotiations.
· With 60 day dispensing taking place in a few months, it’s important to discuss where it may impact your scripts and profit and loss so you can have plans put in place.
· Reflect change in trading hours, staffing rosters, OTC pricing changes, private and under-co-pay script pricing, DAA packing charges etc.
· Talking about plans, your budgets can help set KPI’s which you can share with your managers and team to discuss plans on how we can achieve them together as a team and get valuable insight from your team.
· Review of employee rostering and tasks.
· Look at non-financial data KPI’s and your marketing plans (i.e. customer numbers, script numbers) and see if you can brainstorm on how to grow these numbers and how this can impact your budget figures and what you need in place to achieve this.
· Last of all, make sure your budget is realistic and attainable
These budgeted figures are here to assist you reach your goals and are not set in stone. It can be updated where it is appropriate to do so but it is a tool that will help keep your pharmacy on track, focused and keep the momentum to reach your goals. Regular monthly and year to date reporting on budget v actual will help you to understand how your pharmacy is performing and will be a good prompt for partners and team discussions
Our team here at Peak Strategies can help collaborate with you to build a budget so get in touch with us so we can help plan your goals for the financial year whether it is budgeting, mentoring or marketing.
Written by Victoria Le.
Victoria Le is a highly accomplished Practice Manager at Peak Strategies, boasting an extensive professional background as a Chartered Accountant and Manager spanning more than a decade. With her wealth of experience and expertise, she excels in guiding the organisation towards success and ensuring optimal performance.