Page 42 - Management Theory 2023-2024 Edition

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27. Financial Management of Pharmacies

Functions of Ratios In Financial Analysis: There are a few important ratios that indicate the profitability,
efficiency and overall financial positions of a pharmacy.

A. Ratios Indicating Profitability:

1. Net Profit To Net Sales (NP:NS)
2. Net Profit To Net Worth (NP:NW)
3. Net Profit To Total Assets (NP:TA)
4. Net Profit To Inventory (NP:IN)

1. Net Profit To Net Sales (NP:NS): It can be calculated by dividing net profit by net sales. It is expressed
as a percentage. The normal ratio lies between 3 and 7%.

2. Net Profit To Net Worth (NP:NW): It can be calculated by dividing net profit by net worth. It is
considered the best among other ratios for calculating profitability. The ratio lies between 20 and 25%.
15% is acceptable for older pharmacies and 40% is attainable for newer pharmacies.

3. Net Profit To Total Assets (NP:TA): It is normally calculated by dividing net profit by total assets.
The normal acceptable ratio lies between 10 and 15%.

4. Net Profit To Inventory (NP:IN): It can be calculated by dividing net profit by inventories. It is a good
indicator of both profitability and efficiency. The normal acceptable ratio lies between $0.21 and $0.27.

B. Ratio Indicating Efficiency:

1. Inventory Turnover Rate (IN:TOR)
2. Net Sales To Inventory (NS:IN)
3. Net Sales To Net Working Capital (NS:NWC)
4. Net Sales To Net Worth (NS:NW)
5. Account Receivable Collection Time (A/R CT)
6. Accounts Payable Remittance Type (A/P RT)

1. Inventory Turnover Rate: It is normally calculated by dividing the cost of goods sold by the average of
beginning and ending inventory. The inventory turnover rate should be 4 as a minimum, with a target of
6 or higher.

2. Net Sales To Inventory: It can be calculated by dividing net sales by net inventory. The ratio normally
ranges between 6 and 9.

3. Net Sales To Net Working Capital: The net working capital turnover is computed by dividing net sales by
net working capital. Networking capital assets is current assets minus current liabilities. The normal ratio
range is between 4 and 8. Ratios greater than 8 are considered inadequate capitalization or overtrading.
A value below 4 indicates under trading or too much capitalization.

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