Balance Sheet Basics For
Pharmacies and Drug Stores

A Balance Sheet is a summary statement of the pharmacy’s financial position at a given point in time. The statement balances the firm’s assets (what it owns) against its’ liabilities, which can be either debt (what it owes), or the pharmacy owner’s equity.

During the initial steps of requesting a pharmacy business loan, or a pharmacy business valuation, a pharmacy owner needs to provide a Current Balance Sheet. The balance sheet should represent the pharmacy’s financial position from the most previous complete month. When a funding request is being made, it is imperative to provide the recent financial status of the firm.

Following is a simple explanation of what should be represented on the balance sheet and then why the information is important for a loan officer.

The Basics

Current assets and current liabilities are short term assets and liabilities. This means that they are expected to be converted into cash or paid within one year, or less.

Fixed or long term assets and liabilities are expected to be on the firm’s books for more than one year.

Assets are usually listed in order of the most liquid assets down to the least liquid. Liabilities, like assets, are listed from short term to long term.

Assets
Current Assets (short term):
Cash - the amount of cash currently on hand.
Marketable Securities - are financial instruments such as T-bills that can be quickly turned into cash.
Accounts Receivables - credit sales that can be quickly turned into cash.
Inventories - is the merchandise and medications.
Prepaid expenses - advanced payment of services such as insurance premiums.

Fixed Assets (long term):
Gross Assets (is the cost of the long term assets at their original cost) - land, buildings, vehicles, equipment.
Accumulated Depreciation - is the recorded amount for the depreciation of the assets.
Total Assets - is the difference between the original cost minus the depreciation.

Liabilities
Current Liabilities (short term):
Accounts Payable - obligations owed for inventory or services.
Notes Payable - short term obligations to banks or creditors.
Accruals - Amounts owed, which may not be billed, such as taxes due, or wages payable.

Long Term Liabilities:
Mortgages - real estate.
Installment loans - equipment.

Owner’s Equity
Stockholders Equity - represents the pharmacy owner’s claims on the firm.
Preferred Stock - has a higher priority (senior status) relative to common stock.
Common Stock - stock issued to common stockholders.
Paid-in Capital - is the amount received in excess of the par value of the common stock.
Retained Earnings - is the cumulative total of all earnings retained, but reinvested in the firm to help finance the firm’s assets.

It balances when: total assets = total liabilities + owner’s equity.

These are just the basic entries, which are common on a Pharmacy Balance Sheet Statement. The more complicated and diverse the business, of course the more complicated the balance sheet will be.

Balance Sheet Analysis

Why is it necessary to provide current balance sheet information when making a funding request for a pharmacy business loan? The balance sheet will reveal quick qualifying information that is very important for the Lender.

Cash and Cash Equivalents
With information on the balance sheet that is no older than 30 days it is easy to see what cash position the firm is in. If there is very little cash, or cash equivalents, and the Client is looking to obtain funding - it isn’t going to happen because:

1. They aren’t showing they have the cash to service the debt.

2. Due Diligence needs to be completed. This can include property appraisals, business valuations, third-party analysis of technical aspects of the business, flights, hotels, accountants, attorneys, etc. The pharmacy owner must prove the business is in a financially sound position to receive funding. Therefore, it is the pharmacy owner’s responsibility to pay for the due diligence. If they don’t have the necessary cash, the deal can’t move forward.

Debt Ratios
A quick qualifier calculated from information on a balance sheet is the debt ratio. Debt ratios are intended to measure the degree of the financial risk. The larger the debt position the pharmacy currently has, the higher the interest rates and the higher the term payments must be. Higher payments may make it more difficult for the pharmacy to meet it’s other financial obligations.

Debt ratio = total debt divided by total assets.

This ratio provides a sense of how much of the firm’s assets have been financed, the degree of indebtedness, and the ability to service the debt. Due to lender’s being managed differently, variable economic conditions, and other factors, the acceptable debt ratio from lender to lender will vary.

Owner’s Equity:
Often pharmacy business owners will want the capital they personally invested in the company to be recorded as a loan (debt) instead of stock (equity). They do this in preparation, as a personal safety strategy, in case something was to go wrong with the business and the firm had to be liquidated. With a business liquidation, debts will be paid first before the stockholders are allowed to receive funds from the sale of the assets. This may be an adequate protective stance if the company is not going to being looking for capital. However, if they arrive at a time in the company’s life that they need a loan, or an investor, the debt vs. equity strategy won’t be acceptable because:

1. If a pharmacy business owner is not willing to risk an equity position in his own pharmacy then why should lender?

2. If the pharmacy owner records his investment as debt, this will increase the total liabilities, which could cause the debt ratio to fall outside acceptable levels for a loan.

3. The debt vs. equity strategy will often cause the balance sheet to show a negative equity position, which doesn’t motivate lenders.

Many people attempting to obtain funding on sales hype alone will provide a projected balance sheet based on the perfect picture after receiving funding. Projected statements come later in the funding process. With the initial contact and analysis the lender needs to know the company’s current financial status. Tip: if the pharmacy owner won’t provide current details don’t expect the funding request to proceed to the next step.

When searching for capital, the initial step should be to provide a current balance sheet, along with some basic company information submitted in a one page summary detailing facts about the pharmacy business.

Questions?

Do you have questions regarding financing a pharmacy, acquisitions, or pharmacy valuations? Answers are available at Washburn and Associates.