Have your eye on acquiring a specific independent pharmacy? You’ll want to take a look at their financial statements – including the balance sheet – before making a commitment.
There are several advantages to buying an existing pharmacy, such as the availability of the sales history for prescriptions, OTC, and other items leveraging the existing infrastructure and patient base, including inheriting the potential goodwill and reputation of the business.
But don’t fall in love with the business before you do your due diligence. What do the numbers say about the pharmacy – and is it worthwhile to invest your time, dollars, and energy into it? There are a variety of financial statements/reports you’ll want to use in evaluating the financial health of the business – including the balance sheet.
What is a Balance Sheet?
The balance sheet looks at a specific point in time, documenting what resources are available and how they were financed for the pharmacy:
- The balance sheet gives information on assets, liabilities, and owner’s (or owners’) equity. The basic formula is Assets=Liabilities + Equity.
- Some of the important elements include totals for cash on hand, accounts receivable, short-term investments, property costs/maintenance, employee costs, equipment, inventory (both retail and your prescriptions), and other significant liabilities.
- A balance sheet should always balance, meaning that assets should equal liabilities plus owners’ equity. Owners’ equity should equal assets minus liabilities.
How to Read a Balance Sheet
The balance sheet provides significant insight into the independent pharmacy’s fiscal health. What are the different sections of a balance sheet? A balance sheet has three sections: assets, liabilities, and equity:
1. Assets
Assets are anything owned by the business that could be converted into cash or “liquidated”. Assets are typically thought of as positives on the balance sheet (though there are such things as “contra assets”) and are divided into current and noncurrent or “fixed” assets.
- Current assets, such as cash, marketable securities, inventory, and accounts receivables, can be converted into cash within a year.
- Noncurrent (“fixed”) assets, such as real estate (if you own the store and/or land it sits on), equipment, and trademarks, are not expected to be converted within the year.
2. Liabilities
Liabilities are what a company owes, are obligated to pay, and are an inverse of the assets. These are tallied against the balance sheet. Liabilities are also current or noncurrent.
- Current Liabilities include wages payable, debt financing, rent, utilities payable, accounts payable, and other costs.
- Noncurrent (or “Long Term”) Liabilities are ones not due within a year could be obligations for future products or services, leases, loans, deferred tax liabilities, and bonds payable.
3. Owner’s/Owners’ Equity
The owner’s (or if more than one, then the owners’) equity is what remains when you subtract liabilities from assets. In summary, owner’s equity is anything belonging to the business owners after any liabilities are accounted for.
