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General Hospital Outpatient Pharmacy Acc 311: Accounting Concepts for Health Care Professionals November 22. 2010 1.0 Executive Summary The Purpose of this business plan is to provide medications to inpatients, outpatients, and the employees of the Metropolis Health System. The pharmacy is a retail pharmacy located on the premises of General Hospital in the main lobby. 1.1 Products and Services The General Pharmacy’s primary operations will be to offer brand name and generic prescriptions, diabetic supplies as well as many types of over-the-counter medications such as aspirin, cough syrups, and diabetic supplies to customers within the target market. The General Hospital Outpatient Pharmacy will operate from one location that will fill written, phoned in, internet request as well as mail order prescriptions. We will accept all major insurance plans and offer competitive pricing on all prescriptions. We will thrive by employing friendly and knowledgeable personnel, along with pharmacists who will be provide optimal patient care, with great competitive prices, quality medication and detailed information about their prescriptions that will enhance the revenues of the business. 1.2 The Financing The General Hospital will need $130,000 from the capital expenditure for the retail pharmacy addition. 1.3 Mission Statement General Hospital Outpatient Pharmacy’s mission is to become the recognized leader in its targeted market for providing medication and products to the patients and local area residents of the community. 1.4 Management Team The pharmacy will be run by the General Hospital and the Metropolis Health System. 1.5 Sales Forecasts General Hospital expects a strong rate of growth at the start of operations. Below are the expected financials over the next three years. Proforma Profit and Loss (Yearly) | | | | Year | 1 | 2 | 3 | Sales | $539,663 | $603,243 | $676,799 | Operating Cost | 301,609 | 315,567 | 331,248 | Taxes, Interest, and Depreciation | 15,333 | 15,333 | 15,333 | Net Profit | $238,053 | 303,010 | 360,884 | 1.6 Expansion Plan The Founder expects that the business will expand during the first three years of operation. General Hospital intends to implement marketing campaigns that will effectively target individuals within their targeted market. 2.0 Company and Financing Summary 2.1 Registered Name and Corporate Structure General Hospital Outpatient Pharmacy is going to be registered as part of the Metropolis Health System. 2.2 Required Funds The Pharmacy requires $130,000 of debt funds. Below is a breakdown of how these funds will be used: Projected Startup Cost | | Working Capital | $49,789 | Renovations | 80,000 | Equipment | 50,000 | Total Startup costs | $179,789 | 2.3 Investor Equity General Hospital is not seeking an investment from a third party at this time. 2.4 Management Equity Metropolis Health System owns 100% of The General Hospital Outpatient Pharmacy. 2.5 Exit Strategy If the business is very successful, the CFO of Metropolis Health System may seek to open other outpatient pharmacy at one of the other hospitals owned MHS. 3.0 Products and Services Below is a description of the products offered by General Hospital Outpatient Pharmacy. 3.1 Sales of Medication As discussed in the executive summary, the primary source of revenue for the business will come from the direct sale of prescription medications sold through the General Hospital Outpatient Pharmacy location. An interesting aspect of this segment of the business is that it will be immune from changes in the general economy as people will continue to require medications for their health because most people have private insurance, Medicare, or Medicaid reimbursement to cover their drug costs. The pharmacy will have one full time pharmacist, three pharmacy techs and two cashiers to ensure that all drugs are handled and dispensed properly. Metropolis Health System is currently obtaining the proper licensure so that the business can distribute prescription medication from its retail location. 3.2 Soft Medical Product Sales In addition to the sale of prescription medications, the pharmacy will also sell a variety of over the counter and soft medical goods including pain relievers, products related to women’s health and hygiene, oral hygiene products, and other over the counter items typically found within a pharmacy. 4.0 Strategic and Market Analysis 4.1 Economic Outlook This section of the analysis will detail the economic climate, the pharmacy industry, the customer profile, and the competition that the business will face as it progresses through its business operations. Currently, the economic market condition in the United States is in recession. However, pharmacies operate with great economic stability as people will continue to require medications despite drawbacks in the general economy. Additionally, and as stated earlier, many people have health insurance that covers these drug costs. 4.2 Industry Analysis The retail distribution of pharmaceutical products is one the United States’ largest industries. Each year, the 40,300 retail pharmacy companies in the country aggregately generate more than $153 billion dollars of revenue. The industry employs more than 780,000 people and provides payrolls in excess of $15 billion dollars per year. The industry is expected to grow significantly over the next fifteen years as more people in the “Baby Boomer” generation move into their senior years. As such, they will require greater use of prescription medication. Based on information from the US federal government, the industry is expected to have an annual average growth rate of 6% per year during the next fifteen years. 4.3 Customer Profile General Hospital Outpatient Pharmacy’s target market consists of three different groups, local or walk-ins, mail order and internet customers. * Mail order or internet customers. These groups of customers orders their medications through the mail in an effort to save money. Generally, the mail order customers are older in age, typically over 50. In general, the elderly customers consume more medication relative to the younger age group. The mail order customers mainly order maintenance medications- prescriptions for an ongoing ailment that requires regular treatment. This group of customers will also be more likely to purchase several months of medication at once. * Walk-in customers. These groups of customers are looking for the lowest prices for their medications; however, they tend to purchase medications monthly at their local pharmacy at a higher price. There is not a common demographic for this group of people, other than living in the area. Some of these customers will pay for the medications out of pocket and others will use their insurance. 4.4 Competitive Analysis Competition takes many different forms in the pharmacy industry. To keep our competitive edge we must maintain our position as a low cost provider by ensuring the costs are kept down through operating efficiencies. For example, we will have only one pharmacist and use pharmacy techs to fill the void. As long as a pharmacist is on site during the hours of operation, we can use the pharmacy techs for all other capacities where a pharmacist is usually used. * Chain pharmacies. These are state or national chains such as Rite-Aid, Walgreens and CVS. The advantage to these chains is better prices through economies of scale, as well as personalized service. The personalized service takes the form of the chain having a record of your medication purchases as well as nay allergies that you have disclosed to them. * Local pharmacies. These are the pharmacies where you typically know the pharmacist and they know your medical history. This option is high in personalized service and convenience, and high in price. * Canadian pharmacies. These pharmacies are located in Canada where the cost of drugs is lower than in the United States. These pharmacies can be accessed through mail order, the internet, or via travel. Recently there has been the trend for trips arranged for senior citizens in Northern States to travel up to Canada for the day to pick up their medicines. 5.0 Marketing Plan The General Hospital Outpatient Pharmacy intends to maintain an extensive marketing campaign that will ensure maximum visibility for the business in its targeted market. Below is an overview of the marketing strategies and objectives of the Pharmacy. 5.1 Marketing Objectives * Establish relationships with referring physicians, dentists, and allied health professionals. * Implement a local campaign with the pharmacy’s targeted market via the use of flyers, local newspaper advertisements, billboards, and word of mouth. * Develop an online presence by developing a website and placing the pharmacy’s name and contact information along with the operating business hours with online directories. 5.2 Marketing Strategies General Hospital Outpatient Pharmacy intends on using a number of marketing strategies that will allow the outpatient pharmacy to easily target customers within the target market. These strategies include traditional print advertisements and ads placed on search engines on the Internet. Below is a description of how the business intends to market its services to the general public. The outpatient pharmacy will also use an internet based strategy. This is very important as many people seeking local services and products, such as retail pharmacies, now use the Internet to conduct their preliminary searches. Metropolis Health System will register the General Hospital Outpatient Pharmacy with online portals so that potential customers can easily reach the business. The pharmacy will also develop its own online website showcasing hours of operation and directions to the pharmacy’s location. The pharmacy will maintain a sizable amount of print and traditional advertising methods within local markets to promote the pharmaceutical products over-the-counter medications that the pharmacy is selling. 5.3 Pricing General Hospital Outpatient Pharmacy’s prices will be at the upper edge of what the market will bear, competing with the chain and local pharmacies. The pricing fits with the general positioning of General Hospital as providing high-level expertise. 6.0 Organizational Plan and Personnel Summary 6.1 Corporate Organization 6.2 Personnel Plan Personnel Plan- Yearly | Year | 1 | 2 | 3 | Pharmacist | 70,000 | 72,000 | 74,000 | Pharmacy Techs | 78,000 | 80,425 | 82,493 | Cashiers | 44,000 | 45,335 | 47,200 | Salary & Wages | $192,000 | $197,760 | $203,693 | Number of Personnel | | Pharmacist | 1 | 1 | 1 | Pharmacy Techs | 3 | 3 | 3 | Cashiers | 2 | 2 | 2 | 6.3 Management Summary The management for General Hospital Outpatient Pharmacy will be run by General Hospital inpatient pharmacy. 7.0 Financial Plan 7.1 Underlying Assumptions * The Pharmacy will have an annual revenue growth rate of at least 20% per year. * Metropolis Health System will acquire $179,879 of debt funds to develop the business. 7.2 Sensitivity Analysis The Pharmacy’s revenues are not sensitive to changes in the general economy because the business provides life critical medications to its customers and as such, the business will not suffer any major declines in revenues despite deleterious changes in the economy. However, sales of general merchandise may decline during economic recessions, but the pharmacy based revenues will ensure the continued profitability of the business. 7.3 Source of Funds Financing | | Capital Expenditure | $179,879 | 7.4 Profitability Analysis | Year 1 | Year 2 | Year 3 | Rx Sales | $2,587,613 | $2,692,152 | $2,828,375 | Cost of Goods Sold | 2,047,950 | 2,088,909 | 2,151,576 | Gross Margin | 539,663 | 603,243 | 676,799 | Gross Margin % | 20.9% | 22.4% | 23.9% | Expenses | | | | Salaries and Wages | 192,000 | 197,760 | 203,693 | Benefits | 38,400 | 39,552 | 40,739 | Materials and Supplies | 12,000 | 14,400 | 17,280 | Contract Services and Fees | 14,400 | 17,280 | 20,736 | Depreciation and Amortization | 15,333 | 15,333 | 15,333 | Interest | 0 | 0 | 0 | Provisions for Bad Debt | 25,876 | 26,922 | 28,284 | Misc Exp | 3,600 | 4,320 | 5,184 | Total Expenses | 301,609 | 315,567 | 331,248 | Net Income | 238,053 | 287,676 | 345,550 | Operating Margin % | 9.2% | 10.7% | 12.2% | 7.5 Cash Flow Analysis | Year 1 | Year 2 | Year 3 | Sources | | | | Net Income | $238,053 | $287,676 | $345,550 | Depreciation | 15,333 | 15,333 | 15,333 | Borrowing | 0 | 0 | 0 | Total Sources | 253,386 | 303,010 | 360,884 | Uses | | | | Capital Purchasing | 130,000 | 0 | 0 | Working Capital | 49,789 | 0 | 0 | Total Uses | 179,789 | 0 | 0 | Cash at Beginning of Period | 0 | 73,597 | 376,607 | Net Cash Activities | 73,597 | 303,010 | 360,884 | Cash at Ending of Period | 73,597 | 376,607 | 737,490 | Volume | | | | Number of Prescriptions Sold | 55,530 | 56,457 | 58,151 | 7.6 Balance Sheet | Year 1 | Year 2 | Year 3 | Assets | | | | Cash | $238,053 | $287,676 | $345,550 | Expansion Cost | 80,000 | 0 | 0 | Inventory | 12,000 | 14,400 | 17,280 | Depreciation | 15,333 | 15,333 | 15,333 | Total Assets | $345,386 | $317,409 | 378,163 | Liabilities | | | | Accounts Payable | 303,400 | 303,400 | 303,400 | Long-term liability | 0 | 0 | 0 | Other Liabilities | 0 | 0 | 0 | Total Liabilities | 303,400 | 303,400 | 303,400 | Net worth | 41,986 | 14,009 | 74,763 | Total Liabilities & Equity | 345,386 | 317,409 | 378,163 | 7.7 General Assumptions | Year 1 | Year 2 | Year 3 | Monthly Revenue | $315,563 | $329,061 | $344,371 | Yearly Revenue | $3,786,756 | 3,948,732 | 4,132,452 | 7.8 Expanded Profit and Loss Statements Year 1 Proposal- Monthly Income Statement Detail Return on Investment Analysis | Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Month 7 | Month 8 | Month 9 | Month 10 | Month 11 | Month 12 | Average Rx Sales Price | $47 | $47 | $47 | $47 | $47 | $47 | $47 | $47 | $47 | $47 | $47 | $47 | Average Rx Cost | $37 | $37 | $37 | $37 | $37 | $37 | $37 | $37 | $37 | $37 | $37 | $37 | Gross margin | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | Scripts per day | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | 7.4% | Business Days in the Mo | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | Monthly Scripts | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | 4100 | Rx Sales | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | $191,675 | COG Sold | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | $151,700 | Gross Margin | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | $39,795 | GM% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | 21% | Expenses | | | | | | | | | | | | | Salaries & Wages | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | Benefits | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | $3200 | Material & Supplies | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | $1000 | Contract Services & Fees | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | $1200 | Depreciation & Amortization | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | $1278 | Interest | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Provisions for bad debt | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | $1917 | Mis Exp | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | Total Exp | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | $24,895 | | | | | | | | | | | | | | Net Income | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | Accumulated Profits | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | $15080 | Proposal Year 1- Cash Flow Detail and Assumptions | Yr | Amt | Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Month 7 | Month 8 | Month 9 | Month 10 | Month 11 | Month 12 | Depreciation | | | | | | | | | | | | | | | Renovation | 15 | 80,000 | 444 | 444 | 444 | 444 | 444 | 444 | 444 | 444 | 444 | 444 | 444 | 444 | Equipment | 5 | 50,000 | 833 | 833 | 833 | 833 | 833 | 833 | 833 | 833 | 833 | 833 | 833 | 833 | Total Depreciation | | 130,000 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | | | | | | | | | | | | | | | | Cash Flow | | | | | | | | | | | | | | | Beginning Balance | | | $0 | (163,431) | (147,073) | (130,174) | (112,453) | (94,192) | (73,076) | (51,961) | (28,942) | (4021) | 21,852 | 47,725 | Sources | | | | | | | | | | | | | | | Net Income | | | $15,080 | $15,080 | $15,080 | $16,983 | $16,983 | $19,838 | $19,838 | $21,741 | $23,644 | $24,595 | $24,959 | $24,959 | Depreciation | | | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | 1,278 | Borrowing | | | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total Source | | | $16,358 | $16,358 | $16,358 | $18,261 | $18,261 | $21,116 | $21,116 | $23,018 | $24,921 | $25,873 | $25,873 | $25,873 | Uses | | | | | | | | | | | | | | | Capital Purchasing | | | 130,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Working Capital | | | 49,789 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total Uses | | | 179,789 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | | | | | | | | | | | | | | | | Net Cash Activities | | | ($163,431) | $16,358 | $16,358 | $18,261 | $18,261 | $21,116 | $21,116 | $23,018 | $24,921 | $25,873 | $25,873 | $25,873 | Ending Balance | | | ($163,431) | ($147,073) | ($130,174) | ($112,453) | ($94,192) | ($73,076) | ($51,961) | ($28,942) | ($4021) | $21,852 | $47,725 | $73,597 | References Baker, J. & Baker, R. (2006). Health Care Finance: Basic Tools for Nonfinancial Managers. (2nd Ed); Sudbury, Massachusetts: Jones and Bartlett Publishers