“The budget is not just a collection of numbers, but an expression of our values and aspirations” – Jack Lew
July has finally arrived which means the new beginnings of another financial year. Our team are currently working with our pharmacy clients to prepare the annual budget for the next financial year. This part excites us as we get to review the past year’s performance to see goals our clients have achieved, review what worked and what didn’t work for the business and discuss challenges and opportunities that are occurring in the business.
This year, the hottest topic on everyone’s lips are the positive outcomes that have come out of the 8th Community Pharmacy Agreement (8CPA) which will commence on 1 July 2024. These outcomes include boosts dispensing remuneration, program funding and increase to regional maintenance allowance (RPMA) program. Now is 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 is essential that pharmacy owners have a good understanding of their business; particularly its profitability and cashflow and understand what measures impact these two areas.
We understand that it can be an overwhelming process and that most owners have the following questions/viewpoints when it comes to budgets:
· I’m pretty clued into what’s happening in my pharmacy - I don’t need to budget,
· I don’t have time to do this and we’ll just go with the flow. If we encounter any issues, let’s solve it when it comes up.
· I want to do a budget but I’m not sure how to go about it or what I should be looking at.
What we can tell you is that no matter what mindset you have, time spent on a budget is never wasted time and it will provide focus to stabilise and help your pharmacy grow.
Below, we will answer the most common questions that we 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 we encourage you to prepare one when you can. You can start preparing your budgets for the next financial year from the first quarter July-September but I find most pharmacies will finalise their budgets around August.
Why is budgeting important?
The purpose of a budget helps you achieve the following items to help stabilise and control profitability, cashflow and review overall financial performance and make informed decisions including the following:
· Reviewing revenue trends and working out sale trends 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 able to pay your suppliers on time.
· Building cashflow.
· Have capacity for 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).
All these items will allow you to review year to date performance to see if you are on 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 2024-25 budgets?
Some items/issues we have come across that need to be considered for sole traders, partnerships and companies alike include the following:
· are working partners paid an appropriate wage for their working contribution.
· are the drawings take by each partner in line with their ownership interest percentage
· does the business have the cashflow to support these drawings levels (noting that drawings are usually drawn down to service loan and interest repayments BEFORE any discretionary spending)
· Review loan and interest repayments to ensure they are competitive
· Are the drawings tax effective for each party and has each party sought their own tax advice in relation to this.
· Has life insurance been considered for the partners as part of an effective succession plan?
· Understand the impacts of further rollouts on 60 Day dispensing (60DD) in the coming year and additional handling fees on 60DD.
· Phasing out of the $1 discount on PBS co-payments.
· A freeze in indexation of patient co-payments for medicines listed on the Pharmaceutical Benefits Scheme (PBS).
· Annual CPI indexation of dispensing, dangerous drugs and safety net recording fees.
· Review of services and other opportunities that will benefit your community.
· Implications of vaping
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.
· Use data reports from StrongRoom, Nostradata and 8CPA calculator (pending release).
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?
We 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 since 1 September 2023, it’s important to discuss the impact it has made to your scripts and what strategies that can be put in place for the upcoming year.
· Reflect change in trading hours, staffing rosters, OTC pricing changes, private and under-co-pay script pricing, DAA packing charges etc.
Use your budgets to collaborate with your team, set KPIs and work together to improve the performance of the business and staff buy-in
· 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.
Finally, 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.