When a health crisis strikes, one’s mind is generally too clouded to take a rational decision about choosing a hospital. So, it makes sense to select a hospital when one is in good health, says Sarita D’Souza

Charles was riding a bike with a bag strapped around its front when the strap broke and the bag landed in front of the bike. Charles fell from the bike, with excruciating pain in his leg, indicating a possible broken leg. His wife, Jenny, now had to deal with the question ‘Where should she take him for medical treatment…’

It is best to choose a hospital when you are healthy and do not need the services of one rather than wait for an emergency to arise, which necessitates hospital admission. If you want to decide which hospital to go to during an emergency, the best time to make that decision is when you are well.

CHOOSING HOSPITALS

What factors would you keep in mind when choosing a hospital? According to Dr Amit Dias of Goa Medical College, “Choosing a hospital may be a difficult task for most patients. It may be a good idea to consult your family doctor before choosing a hospital for any condition as it will be a balance between hospital cost, quality of services, expertise of the doctors, comfort available (private room/ general ward/AC rooms and other facilities), convenience of family members, insurance cover etc. A hospital with a good doctor is always the best bet. But everyone may think like you and you may get token number 100 at the OPD!”

Dr Dias adds, “One should be cautious of a hospital with several reports of nosocomial infections (hospital acquired infections) and irregular staff.

If the condition is not serious, like a common cold, the choice of the hospital may not matter much. However, for an emergency such as a stroke (brain attack), myocardial infarction (heart attack), trauma, it is necessary to shift the patient immediately to a hospital that has facilities for early intervention. This means that besides considering a good facility, one must also consider the distance and time taken for travel.”

Studies have indicated that patient preferences for hospitals are influenced by several factors, some of which are listed below:

NATURE OF CARE REQUIRED

Does the hospital have experience and successful outcomes with your condition? ‘General’ hospitals deal with routine conditions while ‘specialty’ hospitals focus on handling certain conditions (such as ‘heart conditions’) or certain groups (such as ‘children’ or ‘women’). If you have a chronic heart condition, you would do well to choose a hospital with more expertise in handling these cases than others.

PROXIMITY TO HOME

How accessible is the hospital? While the distance of the hospital from your home is an important consideration, you need to keep in mind the nature of care required. In case of an emergency at home, where it is critical to get the person admitted immediately, or in case of hospitalization for a longer period of time, nearness to your home is an important consideration. For planned treatment at a hospital, you would need to also consider other factors like the nature of care and whether the hospital is included in your insurance cover.

INFRASTRUCTURE

What is the kind and quality of physical and people infrastructure? Availability of the equipment and infrastructure required for medical treatment is another consideration that is to be kept in mind. While some hospitals do refer patients to other facilities for the specific infrastructure, the nature of your condition and the immediacy of access to the medical equipment would need to be kept in mind. Infrastructure would also include the levels of hygiene and processes in place to control infection at the hospital.

ATTENDING DOCTOR AND CARE

Is your doctor attached to the hospital? Sometimes the decision of which hospital to choose is driven by your doctor and whether he offers his/her services at the hospital. If your decision is influenced by the doctor who would be treating you, you would do well to check if your doctor attends to patients at the hospital. Sometimes, doctors offer their services at a large branded hospital as well as at the next best hospital. The choice between the two hospitals would be influenced by your cost considerations.

COSTS AND HEALTH INSURANCE COVERAGE

Does your health plan cover care at the hospital? In case of cashless facility, the hospital is required to be listed with the insurance company and the Third Party Administrator, to enable you to avail of the facility. If you are going in for a planned surgery, you would need to do your homework before deciding on the hospital.

The cost assessment is particularly important if you are paying from your pocket or in cases where you need to make the payment and obtain reimbursement from your insurance company.

If you choose a hospital well, you could make the most of the limited sum insured. If you choose a hospital that offers healthcare of equivalent quality at a reasonable rate, this claim of a lower amount would help keep the next year’s renewal premium under check, as your previous year’s claim is considered in determining your subsequent premium rate.

QUALITY AND ACCREDITATION

Does the hospital meet quality standards? How well does it check and improve on its own quality of care? Patient care involves clinical care and support activities like requisition of tests, medicines, nurse doctor coordination, infection control, training, etc. These need to run in a coordinated manner to provide the best experience to the patient and relatives. A quality-conscious hospital defines and documents all such activities and organises necessary staff training.

A good hospital would respect the rights of the patient and his family and have in place adequate processes to provide information about the proposed treatment, expected outcome, possible risks and estimated costs, and focus on quality in investigations, surgical services, medication, infection control and regular.

If you do not wait till an emergency to make the decision of the hospital you would like to go to, you would be better prepared to deal with the situation, should it ever arise.

[Sarita D’Souza is a faculty at the Marian Institute of Healthcare Management and can be contacted at sdsouza@marianinstitute.in]

Meena Parulekar – Gomantak Times – Weekender, 20 June 2010

Self-medication is quick and convenient, making it an appealing alternative to consulting a doctor. Meena Parulekar finds out if there are any bitter pills to swallow when it comes to self-medication

Shreya has had a splitting headache for the past two days. Unable to concentrate on her work, she pops tablets of aspirin every two hours to make her feel better. The headache does subside mildly, but she now complains of acidity and stomach pain.

Shreya is among those many of us who, at some point or the other, have indulged in self-medication.

An ambiguous phenomenon, self-medication has attracted the attention of the medical fraternity worldwide. Heard synonymously with over-the-counter products, self-medication has been debated on both its benefits and risk fronts. Self-medication is possible with non-prescription or over-the-counter medicines simply because there is no medical intervention required. In certain ways, the customer – in this case, the patient — has a choice to be exercised like many other consumer products.

An effort to streamline the products that can be successfully self-medicated has been compiled in a WSMI (World Self-Medication Industry) forum that brings together self-medication guidelines for developed countries of the world.

WHY SELF-MEDICATE?

What, then, is self-medication? It is the treatment of common health problems with medicines especially designed and labelled for use without medical supervision and approved as safe and effective for such use.

The objective of self-medication is primarily to enable an individual to understand his/her own health requirements and work as a tool in providing responsible self-care. This becomes even more important in the current state of affairs where the focus has shifted towards prevention of disease rather than cure. Both the level of information available to a health-conscious consumer and the options to promote healthy living have increased manifold in the last decade.

RESPONSIBLE SELF-MEDICATION

Can self-medication really help? If so what is responsible self-medication?

Responsible self-medication: where a patient is able to correctly diagnose his minor ailment, and has sufficient information available about the medicine/s he needs to use so as to make a “responsible” decision whether to use a medicine, which, how much, when, etc and also knows when to stop self-treatment and go to a doctor. The benefits are many, since for every little ailment, one need not rush to a medical practitioner.

Also, considering the fact that these drugs have a well established safety profile and are being used in

low doses makes the patient feel comfortable using them.

However, there is a thin dividing line separating self–medication from abuse of drugs. In a country like ours, this has grown to become a problem of serious nature. From cough and cold remedies to antibiotics and CNS acting agents, a number of drugs have been misused. One of the most important issues highlighted is the ease of availability of these medicines at pharmacies.

According to Raj Vaidya, a Panjim-based community pharmacist, it is common knowledge across the country that, unfortunately, many times one can easily get almost any prescription medicine without producing a prescription – and this includes habit forming medicines and medicines of abuse. So in India, self-medication is not restricted to OTC medicines, it very largely extends to prescription medicine self-medication, which of course is dangerous.

Some of the associated variables with self medication that could be highlighted are:

• Availability of drugs over the counter
• Counselling by the pharmacist
• Level of literacy of the patient/customer
• Information availability of over-the-counter drugs
• Demographic profile of the patient/customer
• Nature of relationship/rapport with the retail pharmacist
• Urgency of need for the patient

BEFORE SELF-MEDICATING

The concept of responsible self-medication has a major deterrent in the form of insufficient information available along with products that can be successfully self-medicated in India. Neither the advertisements nor the labels of the medicine or package inserts provide complete information to the patient in an easy to understand language.

In developed countries, self-medication is more like a social phenomenon. Accepted and practiced by many, products that can be easily self-medicated come with a host of related information, packaging and other benefits. The patient thus, at any point in time is able to comprehend and understand the role of the non-prescription medicine in promoting his health.

As consumers of the medicine, before we choose to self-medicate, it is important that we are aware about simple, but important, facts like:

• Interactions among drugs used for treating different conditions
• Possibility of individual allergies/sensitivities
• Misuse of medication
• Incomplete dosage regimen and its effects
• Storage of the medicine

For Shreya, it implies either to go through some pain and opt for home remedies or take another antiacidity pill for fast relief. There are always options available, but the onus is on us to decide. Shreya could still choose to call her doctor before popping up the next pill!

[The writer is faculty at the Marian Institute of Healthcare Management and can be contacted at meena.sahib@marianinstitute.in]

Meena Parulekar and Ajit Parulekar – Gomantak Times – Weekender, 13 June 2010

Ever noticed that OTC medication is advertised, whereas prescription drugs are not? What are OTC medicines?

It is quite common to see a customer walk into a pharmacy and ask for a medicine to relieve symptoms of pain, gastric upset, vomiting and/ or a headache. From dispensing the dose in terms of number of tablets to giving necessary instructions for use, the pharmacist does not hesitate to hand over the required medicine to the patient. What you have just witnessed is an OTC sale. In other words, a medicine has been ‘sold over the counter’.

Interestingly, the classes of drugs that constitute the OTC category of medicines are wide and varied in our country. From traditional ayurvedic products to health grooming and nutrition products for overall wellness, we have a diverse mix of OTC products available for the consumer.

Some of the common brands that are sold OTC are Crocin, Anacin, Benadryl syrup, Aspirin and D’cold tablets.

In OTC selling, there is another category of products, which have now shifted from the medicinal product category to FMHCG (Fast Moving Health Consumer Goods) category; prominent among them are brands like: Dettol, Moov, Borosoft, Itch guard, Krack and Dermicool.

WHAT IS OTC?

Essentially, for a drug to be available OTC it has to qualify certain criteria of safety. The drug in question must have an established safety profile in the recommended dose backed by sufficient data to prove its

usage in the OTC category. Secondly, it needs to be packaged and labeled in a manner so that it becomes easy for the customer to follow instructions for use.

In recent times, companies are trying hard to get their products over the counter in an effort to either rejuvenate brands or promote simple remedies that can be utilized by patients themselves to get relief from symptoms.

One of the important issues is managing communication for these types of products. As a category, medicines are different from any other consumer goods, specifically because of their constitution and intended use: and are advertised to the medical or paramedical fraternity and not to the common man.

According to the OPPI (Organization of Pharmaceutical Producers of India) code of Pharmaceutical Marketing Practice “Promotion” means any activity undertaken, organized or sponsored by a member company which is directed at healthcare professionals to promote the prescription, recommendation, supply, administration or consumption of its pharmaceutical product/s through all media including the internet.

The above implies regulation for advertising of products available on a doctors’ prescription. For over-the-counter products however, advertising is allowed as can be seen on television. This is also termed as direct to consumer advertising (DTC).

Managing the content of these advertisements becomes crucial for brand managers who handle the product. Whilst the choice of the prescription product brand is made by a doctor who is an expert (and thereby understands drugs, their main and side effects and a lot more); for an OTC product, it is the final consumer who makes the decision. This end consumer has much lower expertise and also relatively lower interest in medicines as a category. Hence, the marketer needs to advertise and promote the OTC medicine in easy to understand language. They also need to name OTC brands differently like Burnol, Krack cream; Ringguard and Itchguard unlike prescription drug brands which have chemical-based names like Bactrim, Droxy, Ceftum etc so that the consumer knows the usage of the medicine from the brand name itself. Doctors, being experts, are in the know of which brand contains which drug; but ask a consumer what drug is contained in Itchguard or Burnol, and you will be staring at a blank expression.

Another aspect which managers have to work on is the packaging, taste and smell of the OTC product (like Digene, Gelusil MPS or Strepsils which are available in orange, lemon and others flavours and colours) simply because the informed consumer is free to choose from a basket of similar OTC products.

HOW THEY ARE DISPENSED

In times where information about a medicine is readily available, managing over the counter products can be a challenging task at the retail level. According to a pharmacist Mr. Raj Vaidya who runs Hindu Pharmacy, in Panjim, Pharmacists do not have much of a problem managing stocks for OTC products. If a

product goes out of advertisements or loses its popularity or there is excess stock lying around, it can be recommended to patients over other brands provided the following norm is followed: the pharmacist must be sure of the diagnosis and whether the ailment can be treated with OTC medicines or needs to be referred to the doctor, whether any medicine is really needed in the first place. He must know what the correct medicine to recommend is and the correct dose. Also, the product must be of a standard company. In this way, one can recommend it to the customer in need rather than any brand of the similar drug.

Sometimes, the choice of offering an OTC to the customer can be influenced by schemes and margins on the product and self usage-by the pharmacist which builds confidence about the medicine and hence results in recommending the same to the patient.

Counselling for OTC products does take place, but is a difficult issue for pharmacists managing the retail setup. Effective counselling requires minimum amount of training by the companies involved and uniformity of advice provided to the customer. In a country like ours, this becomes even more important considering the level of literacy of the general population who visit the pharmacy.

There is hence lot more than what meets the eye at the counter in a retail pharmacy. Effective medicine delivery to promote health and well-being requires keeping the patient’s interest in mind while also managing the existing systems of organizations involved in healthcare delivery.

[Meena Parulekar is faculty at the Marian Institute of Healthcare Management and can be contacted at

meena.sahib@marianinstitute.in. Ajit Parulekar is faculty at the Goa Institute of Management and can be contacted at ajitp@gim.ac.in]

Meena Parulekar and Sarita D’Souza - Gomantak Times – Weekender, 6 June 2010

As shocking as it may sound, blood test reports can sometimes be erroneous, the reasons for which are many.

Seeing his son with a high fever, Rahul took the boy to the doctor. On examining the boy, the doctor asked Rahul to get a blood test done to check for possible causes of the fever. Since it was late evening and he had to travel on work the next day, Rahul took his two-year-old son for a blood test to a laboratory attached to a hospital. The next day, his wife Gauri took the results to the doctor.

The doctor was shocked to see the blood test show the possibility of leukaemia. He waited till Rahul returned and asked him to take his son for another blood test — the results indicated an infection. One can only imagine the angst and turmoil that the parents would have experienced on seeing the initial test results.

As we can see from the above incident, a pathological laboratory plays a key role in diagnosing a health condition. Pathology is understood as the study and diagnosis of disease through examination of organs, tissues, body fluids. Decisions about diagnosis and treatment, hospital admission and discharge largely rest on these test results.

For a lab manager, a wrong blood report signals the need to review the lab’s working. He would do well to examine the process followed at the lab including:

• Entry of the patient and recording of his details
• Checking the tests to be conducted with the doctor’s written recommendation
• Conduct of the test and handling of the blood sample collected
• Labeling of the blood sample collected and storage conditions
• Processing of the blood sample
• Documentation of the blood report
• Handing over of the report to the patient and maintaining a copy for the record
• Timelines involved for all the above

INCORRECT REPORTS

A wrong report could be the result of the following reasons: insufficient blood for testing, wrong details on sample tube and form, wrong sample taken, no signatures, wrong type of tube, mismatch with information on lab records, tube compromised, clotting, ability of processing technician, lab equipment and so on. The lab manager could conduct a root cause analysis to find out the reason/s for the error in the report and then put in place processes to eliminate the cause of the error.

Dr P N Velingkar, who runs a lab in the heart of the city, cites quality of the reagent used, process followed and a possible error in test kit as possible reasons for errors. He suggests that labs examine standards of previous reagents used and track their performance, perform an EQAS (External Quality Assurance Services) regularly. He also opines that while sometimes a patient wants the results urgently, it is important that the lab ensures adequate time for confirmation of results.

This helps review decisions on which tests the lab can conduct, lab layout planning, quality and maintenance of equipment, putting in place proper standard operating procedure for consistent processes, proper storage facilities, training personnel and providing proper working conditions.

REDUCING ERRORS

Continuous improvement cannot rely on a single approach. An error could arise out of several individual causes working together with each other. In addition to putting in place barriers to reduce errors in test results, training initiatives create a sharp awareness of the impact and potential risk of errors in the entire process.

Pathological laboratories face issues like access to patients, availability of trained lab technicians, managing working capital and investment for equipment. Also, according to Dr J P Agarwal, director of a diagnostic centre in Hyderabad, “Some onus also rests on the doctor who does the initial diagnosis. Only when the initial diagnosis is in the right direction, the lab report will also be on the right path.” Thus, there are several operating constraints faced by path labs.

Despite having to deal with several constraints, laboratories would do well to review their working to enable consistent and accurate reports. This would form the basis for better diagnosis and effective treatment so that parents like Rahul and Gauri can rest assured about their son’s diagnosis and treatment.

Health Watch, Gomantak Times 30 May 2010

While a routine health check may seem frivolous and unnecessary, today’s lifestyle makes it more of a necessity. But is Goa ready for health check-up packages, asks Giovanni D’Cunha

[The writer is a faculty at the Marian Institute of Health Care Management, Panjim]

You walk into a restaurant and the first thing you ask for is the menu. The day is not far when you walk into a hospital and demand for the best deal on offer. Or if you are a health conscious executive on the fast track, but don’t have the time for a regular blood test, would this option appeal to you? Your blood sample is collected by personnel from the path lab in the comfort of your home and the reports are delivered to you the next day, or you collect them on your way home.

One way that an individual can monitor his health today is by going for a periodic health check-up which may include diagnostic tests. These tests help to identify specific problems that may crop up due to unhealthy food habits, lack of exercise or a sedentary life style. As a result of the lifestyle that we lead we can become victims of modern diseases-diabetes, cardiac problems, obesity and hypertension-to name a few. Corporate hospitals and diagnostic labs today try to meet the need to provide facilities to conduct diagnostic tests which will aid a doctor to make a conclusive diagnosis of the patient’s current health.

A common process is the following: the patient goes to the doctor, the doctor conducts a physical examination of the patient. Depending on the initial diagnosis, the doctor may prescribe certain diagnostic tests which the patient has to do. He may get these tests done in the hospital’s diagnostic lab or may go to any diagnostic lab in the vicinity that would do the tests for him. Armed with the results the patient goes back to the doctor. The doctor now makes his final diagnosis and prescribes the treatment.

Health packages take this scenario to a different level. Not only does it call for preparedness on the part of the patient but more efficient use of the doctors’ time. Doctors today are dealing with an informed patient. The internet has thrown open doors of medicine and technology to a lay person like never before. Looking at meeting such a need, a number of diagnostic labs have come up in Goa. Hospitals too have recognized a demand for self-prescribed pathological health check-up packages coupled with their revenue potential. Any person can avail of this independently without consultation from a doctor. Packages of this kind are available at many hospitals, but often come at a cost.

Would people in Goa be looking for such a high cost, yet high convenience benefit?

HEALTH CONCIOUS

An extensive study was conducted in Goa this year to understand the patient and doctor perception towards such health packages. The target population was the people in and around Panjim.

The study served to confirm the assumptions of the researchers that people in Goa, living a fast-paced

lifestyle, welcome the idea of health check-up packages. This was chiefly seen among office goers. It was also found that office goers in a higher income bracket preferred to go in for general tests and blood profiling and would also like to design and develop their own test package with the tests that they need. Ronald May, marketing manager at Manipal Hospital, affirms this fact when he says, “Goans are becoming increasingly ‘preventive-conscious’ today. There is a growing trend in people to invest in such packages and curb any illness, if any, in the initial stages itself.”

There are various categories of health packages one can avail of, be it cosmetic, dental, eye, pre-marital, or just a general body-watch. Besides general blood tests, a comprehensive health check-up consists of tests such as the lipid profile, liver, thyroid and kidney screening, stress screening, eye and ENT examination, pulmonary function tests, gynaecologist consultation and pap smear tests.

Today’s unhealthy lifestyle makes it mandatory for everyone to undergo a complete health check up, at least once in a year. The periodic check up helps in identifying the cause of diseases at a very early stage and provides the opportunity for the proverbial “stitch in time”.

The Navhind Times – Zest, 15 May 2010

The focus is shifting and healthcare delivery has moved from the domain of physician care to the domain of the healthcare delivery organization. While new insights continue to be gained from professional practice in the field of health care, one also needs to look at practical aspects of delivering healthcare.

[The author, Meena Parulekar, is faculty at the Marian Institute of Healthcare Management]

The health sector encompasses various services that aim primarily towards affordable care and preventive medicine. Availability of skilled medical personnel, access to healthcare and insurance for the poor, freedom from preventable diseases like malaria and pneumonia are a few issues that are faced in delivery of healthcare.

While these continue to be challenges for the public health system in India, the last decade has seen changes like growth of organized healthcare with players like the Apollo group, Ranbaxy, Max India, Wockhardt and Fortis entering the healthcare market and opening up of the insurance market to the private sector.

With competition setting in, the emphasis is on value and greater transparency about quality, services and prices. One of the most important reasons cited is the changing expectations of the patient who wants to be actively involved in the ‘care’ delivery process. A paradigm shift of hospitals towards service lines in this changing scenario would hence become inevitable. In a well established clinical service line, physicians and administrators can exchange views more easily and share best practices with colleagues elsewhere in the system. If we look at the existing systems of knowledge exchange in the healthcare domain , it appears to be a one way flow from research which is funded by external agencies to the delivery stage (doctors, nurses ) and then to the patient. This meant that the doctor is the main caregiver.

The focus is shifting and healthcare delivery has moved from the domain of physician care to the domain of the healthcare delivery organization. While new insights continue to be gained from professional practice in the field of healthcare, one also needs to look at practical aspects of delivering healthcare, e.g. In the materials management department of a large tertiary hospital, who will do what, when, where and how? How will they hand over tasks, decision rights and accountability to the next person? These are issues that require managerial intervention. In a hospital where patient handling is critical, focus on managing patient waiting times becomes important. Similarly, considering the work environment of health care workers like nurses in a hospital, understanding their social and job related needs becomes a critical issue.

The McKinsey report of December 2008 on healthcare spending in the US re-affirms the need for healthcare reform while highlighting the importance of its stakeholders-doctors, payers and hospitals- involvement. Despite having among the better facilities in terms of hospitals and innovations in technology, it has been found that the cost of spending on healthcare for the common man in the US is perhaps the highest.

Thus, there is a felt need to narrow the gap between clinical practice and management practice in healthcare delivery organizations in order to ensure effectiveness and efficiency of ‘care’ delivery.

Management is a science that is based on observation and facts. The role of a healthcare manager would be to plan, organize and manage care and management of institutions in which care takes place. Put simply a healthcare manager would be in a position to guide these centers of healthcare delivery in making effective decisions that benefit the patient while also serving the organization interest . Any new intervention of designing processes and operating systems for the organization would require an understanding of the nature of clinical processes and the relationship between the medical knowledge, care processes, organizations and practitioners. Thus, healthcare as a domain, is fast emerging to be an integrated discipline. There is a component of industry intervention (pharmaceuticals, biopharmaceuticals and insurance) and patient focus that guides the efforts of skilled professionals in this sector.

A healthcare management program can be objectively designed keeping the above requirements in consideration. What a student is able to achieve through a healthcare MBA program is this objective of (a) Understanding the working of the organizations in the health sector,

(b) Drawing on management knowledge and competencies to deal with the specific issues faced in managing healthcare, and

(c) Gathering an integrated view of the entire system of healthcare delivery

Given the emerging trends in scale and needs of healthcare in India, a focused management approach to the specific issues faced in healthcare would serve the needs of the sector and also help the individual to contribute to achievement of better standards and in turn enhance the quality of overall healthcare delivery.

ExpressPharma 31 March 2010

Sherin Moraes, a student at Marian Institute of Health Sector Management, Goa writes about the implications of liquidity and profitability in a pharmaceutical company

A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. Investments in current assets are inevitable to ensure delivery of goods or services to the ultimate customers. A proper management of the same could result in the desired impact on either profitability or liquidity.

Liquidity is a precondition to ensure that firms are able to meet its short-term obligations. The ‘liquidity position’ in a company is measured based on the ‘current ratio’ and the ‘quick ratio’. The current ratio establishes the relationship between current assets and current liabilities. Normally, a high current ratio is considered to be an indicator of the firm’s ability to promptly meet its short term liabilities.  The quick ratio establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value.

Consequences of low liquidity

a) A company that cannot pay its creditors on time and continues not to honor its obligations to the suppliers of credit, services and goods could result in losses on account of non-availability of supplies and lead to possible sickness or insolvency. Also, the inability to meet the short term liabilities could affect the company’s operations and in many cases it may affect its reputation as well. Lack of cash or liquid assets on hand may force a company to miss the incentives given by the suppliers of credit, services, and goods as well. Loss of such incentives may result in higher cost of goods which in turn affects the profitability of the business.

b) Every stakeholder has interest in the liquidity position of a company. Suppliers of goods will check the liquidity of the company before selling goods on credit. Employees should also be concerned about the company’s liquidity to know whether the company can meet its employee related obligations–salary, pension, provident fund, etc. Thus, a company needs to maintain adequate liquidity.

Profitability is a measure of the amount by which a company’s revenues exceeds its relevant expenses.4 Profitability ratios are used to evaluate the management’s ability to create earnings from revenue-generating bases within the organization.

The ‘profitability position’ of a company is measured using the ‘gross profit margin’ and the ‘net profit margin’. The gross profit margin is an indicator of the profit a business makes on its cost of sales, or cost of goods sold. It is the profit earned before any administration costs; selling costs and so on are removed. The net profit margin is an indicator of the amount of net profit per rupee of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the net profit is the profit that is left, out of which the company will have to pay interest, tax, dividends and so on.

Consequences of low profitability

A profit ratio indicates how effectively management can wring profits from sales. It also indicates how much room a company has to withstand a downturn, fend off competition and make mistakes. Potential investors are interested in dividends and appreciation in market price of stock, so they focus on profitability ratios. Managers, on the other hand, are interested in measuring the operating performance in terms of profitability. Hence, a low profit margin would suggest ineffective management and investors would be hesitant to invest in the company.

Thus, a financial manager has to ensure on one hand that the firm has adequate cash to pay for its bills, has sufficient cash to make unexpected large purchases and cash reserve to meet emergencies, while on the other hand, he has to ensure that the funds of the firm are used so as to yield the highest return.

This poses a dilemma of maintaining liquidity or profitability as indicated in the figure below:

The liquidity and profitability goals conflict in most decisions which the finance manager makes. For example, if higher inventories are kept in anticipation of increase in prices of raw materials, profitability goal is approached, but the liquidity of the firm is endangered. Similarly, the firm by following a liberal credit policy, may be in a position to push up its sales, but its liquidity decreases.

Similarly, there is a direct relationship between higher risk and higher return. A company taking higher risk could endanger its liquidity position.8 However, if a company has a higher return it will increase its profitability.

The liquidity and profitability ratios of four pharmaceutical companies-Cipla, Divi’s Laboratories, Bafna Pharmaceuticals, and SMS Pharmaceuticals-over a four year period were analysed to understand the relationship between liquidity and profitability. (See Box)

The liquidity and profitability ratios of the above four pharma companies indicate that liquidity and profitability could go hand in hand. Except the year 2008, there is a positive correlation between the movement in the profitability ratios and the liquidity ratios. Despite the limited scope of this study, the observations would suggest that a company while planning working capital need not maintain a trade off between the two as is usually felt. In the light of the above, financial managers would need to reflect on the implications of each decision that usually involves a trade-off between liquidity and profitability. It would also be useful to assess the effect of one decision involving this trade-off vis-à-vis another, so that an overall view can be taken.

The present economic scenario has its implications on liquidity and profitability. ‘Recession means a general slowdown in economic activity over a period of time. Production, employment, investment spending, capacity utilization, household incomes, business profits and inflation fall during recessions; while bankruptcies and the unemployment rate rise. Because of this, companies are reverting inwards. In order to survive during these times, frugal measures need to be adopted. ‘Frugal basically means prudent, not wasteful, wise in expenditures, and inexpensive’. Being frugal would involve measures such as:

Decreasing the size of sales force and concentrating on highly trained sales reps that have already established relationships with physicians. This reduces the amount of liquid cash needed to be kept to pay salaries to sales reps; thereby increasing the liquidity position.

Focusing on already established relationships rather than trying to build new ones reduces the amount of money needed to be spent in order to acquire new customers.

Embracing technology,such as use of e-detailing programs, can reduce expenses incurred by the company, and hence enhance the liquidity position of the firm.

REFERENCES:

http://www.msrit.edu/dept/mba/iitpowai.pdf; Date accessed: 23rd August 2009

http://www.accounting-ebook.com/15/1.pdf; “Meaning and importance of liquidity”; Date accessed: 23rd August 20093. http://moneycentral.msn.com/investor/invsub/results/compare.asp?page=financialcondition&symbol=prx, Date accessed: 23rd August 2009

http://campus.murraystate.edu/academic/faculty/larry.guin/fin330/liquidity%20vs%20profitability.htm, “the liquidity vs. Profitability tradeoff”, date accessed: 23rd August 2009

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http://www.investopedia.com/articles/fundamental/04/042804.asp – the bottom line on margins, Date accessed: 22nd August 2009

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