Abstract
A patient survey at a community hospital in which I serve as the chief financial officer indicated the need for a commercial 24-hour pharmacy within the hospital. The pharmacy would ensure that patients and families fill prescriptions and begin taking prescribed medicines as and when ordered instead of waiting for the following day. In response to the findings of the survey, this paper seeks to look into the viability of the business. Herein provided is the proposal for the first three months of operations. The paper also looks into the financial implications of the proposed project by looking into the time value of money. Additionally, this paper also provides the profitability analysis for three years. The first three months will require the community hospital to look into the vendor financing arrangements. Establishment of the 24-hour pharmacy may be influenced by the introduction of new rules on drugs and pharmacies
The first three months will involve the business development stage where the startup drug inventory will be requisitioned. The community hospital will, therefore, focus on identifying, ordering, and acquiring the drugs required as inventory in the hospital. Considering that this is the beginning stage of investment in the new business line, the community hospital and the business development staff to the hospital may be required to look into the statistics of the drug types that are most commonly demanded or prescribed at the hospital for purposes of inventory optimization.
The first three months will also require the community hospital to look into the vendor financing arrangements. The rationale in this is that the hospital may not have the funds to acquire inventory in cash. Consequently, there is the need for the hospital to identify suppliers and enter into business contracts for the supply of the drugs and the payment/financing options available. Considerably, the agreements must entail how the hospital seeks to manage the accounts payable about the supplies of drugs (Fracassi, 2016).
The first three months will also require the assessment of how the new business lines’ personnel salaries will be settled. Notably, the first three months may involve costs higher than the cash inflows that may be expected from the hospital. Consequently, this means that the company may have to bring on board extra funds to meet the obligations of paying the personnel costs including salaries and benefits.
In addition to the above-identified items, there is the need to consider the renovation needs, the disposable supplies, and the cost of equipment and how these affect the operations of the business over the first three months. Notably, it is assumed that the community hospital already has a building in which the 24-hour pharmacy will be established. Secondly, it is assumed that the hospital will be required to renovate the building, which makes the renovation costs part of the initial capital required to put the building under conditions suitable for the new business line. Thirdly, the hospital will be required to bring in equipment that may be required for the actualization of the business.
Looking at the needs of the first three months, there is the need for both working capital and long-term capital. The community hospital ought to raise the working capital for the disposable supplies, inventory, salaries and benefits, as well any other elements that may need to be settled. There are several ways for the hospital ought to manage the working capital. Having arrangements with the suppliers on the handling of accounts payable marks the beginning. Secondly, the hospital may have to acquire short-term financing to handle the working capital needs as well as the salaries and benefits of the employees. Other than the working capital needs, the hospital needs long-term financing for the capital investments including the renovations and the acquisition of equipment. The need for long-term financing would be required considering the fact that the renovations and the acquisition of equipment are long-term investments for the community hospital hence the need to match the long-term financing and long-term investments. The choice between the short-term financing and the long-term financing brings out the concept of time value of money as will be explained in the other sections of this proposal (Titman, & Martin, 2014).
There are several ways in which the rate of return. The two most common approaches include the net present value and the internal rate of return. The two methods incorporate the concept of time value of money hence reflecting the actual value of funds either received or paid now or at a specified future date. Other than being tools of determining the rate of return, the net present value and the internal rate of return are used as project appraisal tools meaning that looking at the rate of return from the two methods helps the CFO in determining whether it is worth it for the organization to invest in the project. Considerably, if the NPV is negative, then the community hospital should not invest in the 24-hour pharmacy. On the other hand, if the IRR is less than the cost of capital, then the business entity should not invest in the project (Ehrhardt & Brigham, 2016).
Schedule of Assumptions
Profit projections for the first three years
Considering the initial capital and the free cash flaws as indicated by the profit after tax values above, the project is from a general perspective profitable. The NPV and the IRR would be expected to be positive and above the cost of capital which has been hinged at 10%. Consequently, the invest ought to be considered as viable, and the community hospital would be expected to consider investing in the project.
Notably, the analysis as provided above assumes that the premises for the business line are already available. However, if the costs of building or acquiring premises are included, the rate of return may be affected hence the need to incorporate other factors in the determination of the viability of the project. Notably, the board might ask a question about the viability of the project including what the IRR and the NPV of the project is, and this justifies the use of the two tools for project appraisal and analysis (Vernimmen, Quiry, Dallocchio, Le Fur & Salvi, 2014).
In concluding, the establishment of the 24-hour pharmacy may be influenced by the introduction of new rules on drugs and pharmacies. Such laws would be laws requiring that hospitals be run or operated separately from the pharmacies among other such needs. The laws may also touch on capitalization of the business as well as other factors such as the facilities required for the operation and running of a pharmacy. If such laws are introduced, then it would mean that the cost of running the business rises and hence influencing the NPV and IRR (Brealey, Myers, Allen & Mohanty, 2012). The project will be rejected if the implications are adverse.
References
Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. New Delhi: Tata McGraw-Hill Education.
Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Stamford: Cengage Learning.
Fracassi, C. (2016). Corporate finance policies and social networks.Management Science.
Titman, S., & Martin, J. D. (2014). Valuation. New York: Pearson Higher Ed.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014).Corporate finance: theory and practice. New Jersey: John Wiley & Sons.
