Cash Flow, Inventory, and Your Financial Health Ollin Sykes, CPA, - - PDF document

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Cash Flow, Inventory, and Your Financial Health Ollin Sykes, CPA, - - PDF document

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10/18/19 1 Cash Flow, Inventory, and Your Financial Health Ollin Sykes, CPA, CTIP, CMA Scott Sykes, CPA Sykes & Company, P.A. 2 1 10/18/19 Disclosures There are no relevant financial relationships with ACCME- defined commercial

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Cash Flow, Inventory, and Your Financial Health

Ollin Sykes, CPA, CTIP, CMA Scott Sykes, CPA

Sykes & Company, P.A. 2

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Disclosures

There are no relevant financial relationships with ACCME- defined commercial interests for anyone who was in control

  • f the content of the activity.

3

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

4

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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
  • Manual reconciliation is time consuming and increases

payroll costs

  • Manual reconciliation is not necessary and inefficient
  • Utilize technology resources in the marketplace

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#2 – Know Your 3rd Party Receivables

  • Best Practices for Reconciliation – continued
  • Technology captures the information in real time
  • Does require uploads of 835 files or EOB’s for some payers
  • 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
  • pportunity 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
  • wner 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: ollin@sykes-cpa.com Twitter: @OllinSykes

Scotty Sykes, CPA

Direct: 252.632.0012 Email: scott@sykes-cpa.com Twitter: @ScottySykesCPA

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