Budgeting

define budgeting

usually operational (short term) plans concerning sales and profit forecasts within the next year → translates the pharmacy’s objectives and functional plans into monetary terms

planning

identify areas where operations can be improved by eliminating inefficiencies

directing

coordinating management’s decisions and actions to achieve the company’s budgeted goals

controlling

process of comparing actual performance against the budgeted goals

operating budget

shows the anticipated revenues and expenses for the coming 6-12 months

sales budget

expressed in number of prescriptions expected to be dispensed for the budget period

cash budget

shows anticipated cash in flows and out flows for next 6-12 months

capital budget

shows planned investment in fixed assets (common in big organizations like hospitals and chains)

identify major factors considered when forecasting sales

• past sales levels and trends

• general economic trends

• economic trends in pharmaceutical industry

• other factors to effect sales in industry

• political and legal events

• intended pricing policy of pharmacy

• planned advertising/promotional activities

• expected actions of competitors

• new goods or services contemplated by pharmacy

• market research studies

simple demand forecasts for existing pharmacies

based on the trend of demand over past several years; any estimates based on past years’ data assumes future conditions will be similar

what should be included in demand forecasts for existing pharmacies

consider factors and internal factors, utilize optimistic, pessimistic, and most likely estimates

simple demand forecasts for new pharmacies

market potential → total demand in pharmacy’s market area of goods and services; can be developed from published stats on area demand

must attempt to determine the share or proportion of total area demand; depends on pharmacy’s marketing program and competition

fixed budgets

based on a single level of forecasted demand; manager develops the best possible forecast demand and base revenue and expense projections on this

flexible budgets

allows variables to change in response to changes in demand; increase or decrease in direct proportion to changes in demand (preferable for pharmacies that experience wide or unexpected variations in demand)

how to analyze budget variance of a pharmacy performance report

manager determines which variances are large enough for further investigation, and determine why said variances occurred (both positive and negative) -→ differences between budgeted and actual amounts

what is in a pharmacy performance report

actual revenues and expenses, budgeted revenues and expenses, and difference between the two

favorable variance

if variance increases net income (positive revenue or negative expense)

unfavorable variance

if variance decreases net income (negative revenue variance or positive expense variance)

what factors can affect budget variances

• volume

• price

• mix effects/differences

list advantages of budgeting

• provide a plan to be followed by managers

• improve management decisions by planning for future

• provide benchmarks or goals for employees

• thorough business analysis

• internal benchmarks where performance can be measured (identify deviation early)

• helps understand overall goals and how individual responsibilities can impact success

list disadvantages of budgeting

• may artificially inflate budget → drain resources from other areas

• promote setting goals that are easy to reach and doesn’t challenge the organization

• based on level of judgement; managers can approach differently

• takes time away from other business activities

• don’t account for business concerns such as quality of service or customer satisfaction or motivated employees

• can be seen as restrictive and limiting opportunities