Advice You - Business

As I have seen over the years the workings of companies large and small I have always been surprised at how few CEOs and MDs really get their monthly reporting information set up to help them run and have control of the business. So here’s my check list on what I believe you need do:

To run your business effectively it is essential that you have the ri

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

ght financial and other key performance indicators provided to you – regularly and you need to remember that (regardless of what others may think) this information is there simply to help you run the business.

You must therefore ensure you get it in a format, a level of detail and using terminology that you are happy with.

Accountants, just like most p

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

rofessions, make their activities appear more complex and difficult to understand than necessary - I think it must be some form of self-preservation activity that we all have!

So let's start with the terminology:

Each of these terms mean exactly the same thing:

orders = bookings
order book = backlog
backlog = overdue orders = back orders

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

br> sales = revenues = turnover
cost of goods sold = cost of sales
gross profit = trading profit = contribution
operating profit = trading profit = PBIT = EBIT = surplus = EBITDA(sometimes)
earnings(sometimes) = EBT = PBT = net profit
debtors = receivables
creditors = payables
stock = inventory(sometimes)
cash

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

= liquidity
work in progress = work in process

- and there are many more*

So you need to get in your helicopter and take control – you’re the boss. Decide which accounting terminology (finance-speak) you wish to adopt and then make everyone, including your auditors, stick with that in everything you, and they, do.

The next thing you need to b

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

clear about is the information you need and the way in which you want it to be presented.

All the figures you see in a set of accounts are, by definition, historical but what you need to do, of course, is look to the future. Running a business successfully is much more about looking at trends rather than absolute figures and you need to track key finan

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

cial information month on month, year on year and against budget to really see the direction the business is going in. It is so easy to get bogged down in the detailed numbers and miss the big picture – and I’ve actually seen this more with Corporates than with SMEs.

I worked for Burmah Oil at one time and their monthly reporting packs and annual budg

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

et packs were up to 50 pages long! – and were not drawn up in any way to help the CEO run the business. When I was at BTR, however, the reverse was true. They had the most outstanding monthly reporting pack I have come across – it was never more than ten pages and the first page summary gave you an instant overview of the business from which you could

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

hen go further into any areas of concern. I’ve since used that format in many companies and if you’d like a copy just drop me an email at roger@rogerharrop.com

So what information do you need on this front summary sheet?

• Start with what’s most important - Profit – that is if your purpose in some way involves profitable growth.
• If you’re i

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

n the type of business where there is a time lag between receiving the order and the sale taking place then you need Order Input as this is the very first indication you get of what’s going on in the business.
• Also have Order Book so you can see what you’ve got to go at.
• ROS (Return on Sales) – see later
• Depending on the business,

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

ne or two balance sheet items always including Receivables.
• Cash Flow is very important
• People Numbers
• one or two non-financial ratios which are relevant to your business for example OTIF (delivery on time in full) and maybe a quality, customer satisfaction, service level or health and safety measure.

That information alone shown

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

month on month, tracked against last year and your budget should give you sufficient trend indications to see instantly the health of the business and how things are going.

Next I have always found the need to get in the helicopter and look at the big picture more with financial information than probably any other area of the business. Along those lin

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

es, I would strongly recommend that you draw up a simple “helicopter” P&L account with only those 7 elements shown below whenever you are looking a budget - be it your own, or one that, maybe, a subsidiary company is putting forward to you for approval, or indeed merely to compare year on year performance:

If you're in a manufacturing business then as l

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

kely as not you will have some element of labour and factory overhead taken into your product costing and your gross margin calculation and I find whenever comparing year on year this can really make true comparisons difficult. So if you have such a business you will need to have a further line included above of labour, overhead and materials going into

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

or coming out of stock (just one figure) to complete the P&L statement.

If your purpose, like many businesses, includes sustained profitable growth then a key performance indicator is ROS (Return On Sales). This is PBIT as a percentage of sales and what you are seeking to ensure is that not only your absolute profit figure increases year on year but als

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

that your ROS also improves every single year. For that to happen, of course, one or more of the P&L elements below the sales level in the P&L must be reducing as a percentage of sales. The key ratios therefore you should look at in the above P&L when comparing, say, a budget for next year with forecast performance for the current year are simply th

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

e individual line ratios against sales - because only by each of those reducing can the ROS increase - it really is that simple!

We’ve concentrated so far mainly on the P&L but, of course, businesses go bust because of a lack of cash not a lack of profit. Control of working capital (essentially receivables, payables and inventory) is very important fo

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

r you to monitor. You should regularly look at receivables days and inventory days (where appropriate) and have a discipline of doing regular cash flow forecasting -which really isn't hard to do with a reasonable degree of accuracy no matter your business. You may by now be saying to yourself that you can really rely on your Accountant or your Finance

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

Director or Controller (depending upon the size of your business) to do all the above analyse and monitoring for you and you should not need to worry about this. Please do not make that assumption - it's very dangerous. It's your job to run the business, and that means that it’s your job to keep a grip on the key numbers and trends.

© 2006 Roger Harr

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

op

* Before writing this article I put this list to about a dozen financial people around the world. I received back from a number of them some very pedantic statements that I was wrong and that certain terms were definitely not equivalent and had quite different meanings. The problem was, however, not all this pedantic statements agreed with each other

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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Accurate financial's are the key to knowing the health of a business. Bookkeeping is the process of maintaining these reports. Accurate and timely bookkeeping is key to the successful operation of businesses of any size.

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