Executive Summary
There is an increased demand within the hospital for the introduction of a 24-hour operational commercial pharmacy to ease the burden of waiting for the daytime hours to acquire the prescribed drugs. Based on the patient surveys, families and patients would like to acquire drugs immediately once they are prescribed rather than waiting for the following day to acquire such medicine. The introduction of the 24-hour operational commercial pharmacy will not only benefit the families and patients in ensuring efficiency, but also generate more revenue to the hospital. This business proposal has five sections. The first section discusses the working capital needs for the startup and related expenses. Two viable options for measuring the rate of return in the optimization of financial performance are provided in the second section. The third section provides a three-year profitability analysis for the project. The scheduled assumptions for this proposal are given in the fourth section. The last section discusses how the current changes in both the federal state and policies may influence the decisions regarding the proposed project.
Working Capital Needs
Regardless of the size of the firm, working capital (WC) gives an insight of the ability of the company to not only access financial markets but sustain its regular operations (Dong, 2010). Therefore, the WC is a significant metric in measuring the liquidity of an entity. For instance, the company us termed to be financially sound if it can at any time meet its short-term obligations. The WC metric also is essential in measuring the ability of the firm to meet its long-term obligations (Hill, Kelly & Highfield, 2010). Therefore, the ability of the hospital to convert the assets to cash to meet operations expenses shows that its operating liquidity is high. For the construction of the proposed 24-hour pharmacy to be a success, the hospital will require readily available cash to acquire the two month’s startup inventory, vendor financing, personnel costs, renovations, disposable supplies and the equipment cost.
Startup Cost
The start-up cost provides an estimated cost required to introduce a new venture (Barringer, 2012). This section provides an estimate of the start-up cost for the introduction of a 24-hour commercial pharmacy within the hospital. Majorly, the project shall not entail the construction of a new pharmacy but it will be rather the expansion of the current pharmacy to serve the intended commercial purpose. As noted earlier, the hospital’s WC is sufficient to fund the short-term requirements of the commercialized pharmacy. Similarly, the hospital’s operational liquidity is high and in the long-term the hospital can acquire credit funding to ensure continuous operation the 24-hour operational commercial pharmacy.
Viable Options for Measuring the Rate of Return
The two viable options to measure the rate of return with an aim of optimizing the financial performance of the proposed department are the net present value (NPV) and the internal rate of return (IRR) (Osborne, 2010). The two proposed options are significant since they take the time value of money into consideration. The NPV is a discounted cash flow technique mostly applied in capital budgeting to evaluate the viability of an investment project. The rationale used to determine the viability of a project when using NPV is based on the cash inflow. For instance, if NPV is equal to zero or greater than one, the project is profitable and can be undertaken. That is if NPV ≥0 the project is accepted but if NPV≤ 0, the project is ignored (Osborne, 2010). IRR is another option than can measure the rate of return. IRR is in other terms an economic rate of return that makes NPV be equal to zero. The rationale for accepting a project when using the IRR is based on the current rate of return. Therefore, if the IRR is greater equal to or greater than the projected rate of return the project can be accepted and the reverse is true (Osborne, 2010).
Profitability Analysis for 3-Years (2016, 2017 and 2018)
The profitability analysis in Table indicates that the cash inflow will overweigh the cash outflow for the three projected years. It, therefore, implies that the NPV is positive, and the project can be undertaken.
Assumptions of the Proposal
There are six assumptions undertaken during the implementation of the plan. Firstly, the hospital’s operational liquidity is high to finance the first two month’s start-up cost. The required $47,000 in the first two month’s will be financed by the hospital’s convertible assets to cash. The long-term funding of the proposed project will be financed by credit since the hospital is credit worth. Secondly, the 24-hour commercial pharmacy will be an expansion of the current pharmacy to meet the increasing demand. Therefore, the amount of expansion will remain constant for the three years while the cost of inventory, supplies, salaries and cost of equipment is likely to increase. Due to guaranteed increased demand, a number of sales revenue is likely to increase steadily. The amount cash available at the end year for the three years is also likely to increase significantly.
How Current Changes in the Federal State and Local Policies May Influence the Decisions to be Made
The current changes in the federal state and the local policies are likely to influence the way in which the decisions regarding this venture will be made. For instance, the current minimum wage rates are likely to increase the cost of personnel cost. Similarly, the increased value added tax is likely to change in the coming years, and that will influence the pricing decisions of the offered drugs. The prices of the medical products offered will as well be regulated by the government to protect consumers. Lastly, the increasing environmental awareness more so the climate change may force the hospital to spend more disposals. The hospital will have to acquire modern disposal equipment to ensure that there is no environmental pollution.
Conclusion
The commercialization of the pharmacy to operate in 24 hours will increase efficiency and increase revenue generation for the hospital. The project seems profitable based on the profitability analysis for three years. The net cash flows over weigh the cash outflows for the three years indicating that the project is worth.
References
Barringer, B. (2012). Entrepreneurship: Successfully Launching New Ventures, (2012).
Dong, H. P. (2010). The relationship between working capital (WC) management and profitability: a Vietnam case.
Hill, M. D., Kelly, G. W., & Highfield, M. J. (2010). Net operating working capital (NOWC) behaviors: First looks. Financial Management, 39(2), 783-805.
Osborne, M. J. (2010). Resolutions to the NPV–IRR debate?. The Quarterly Review of Economics and Finance, 50(2), 234-239.
