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FY 2020: THE MOST IMPORTANT FINANCIAL BSTATEMENTS EVER? y now, most pharmacy owners have completed their June BAS, reviewed stocktake values and attended to routine procedures necessary to complete their annual financial statements. My accounting team has already completed the financial statements for many of our pharmacy clients, especially those with strict reporting requirements to comply with their bank loan covenants. It’s surprising how many pharmacists procrastinate over completing their annual financial statements each year. Surely it’s much simpler to deal with issues when they’re fresh in your mind, rather than trying to remember what happened six months back down the track; let alone trying to collate old documents, statements, etc., just before income tax deadlines months from now. Part of our pharmacy analysis work (for banks, dispute resolutions, etc) requires us to review and interpret financial data including financial statements. When undertaking these engagements, I’m often amazed to find that many pharmacies haven’t at least drafted their annual reports, six months or more after the end of that previous financial year. We’ve recently embraced the new 7th Community Pharmacy Agreement. Many pharmacy owners who are approaching retirement age might now be considering whether this might be a suitable time to sell their business, now that prospective buyers perceive more certainty. For that reason, I believe the next 12 months could see many pharmacies hit the market for sale. This could provide significant competition among sellers, and possibly shift the balance in the marketplace (where potential buyers have outnumbered the pharmacies available for sale). For those pharmacy owners, these 2020 financial statements could be the most important they have ever prepared. If you’re a potential seller, ensure your financial statements are accurate and reliable. Buyers place a high degree of importance on these reports, as they’ve been prepared by the pharmacy’s external accountant (usually for tax purposes). The reports are completed using generally accepted accounting principles and as such should be materially consistent with industry benchmarks. If the financial statements have not been carefully completed, then possibly: • Profitability could be understated, resulting in a lower value/selling price. • If profit is overstated this could lead to misrepresentation of performance, which can’t be verified by the buyer in a due diligence before acquiring the business (thus the sale may fall through or the price renegotiated). We’ve conducted several due diligence engagements where the trading performance reported in the financial statements was significantly different to the pharmacy’s supporting records. A due diligence is essentially a ‘pre- purchase’ inspection of the business, conducted by the buyer (or their advisers) before exchanging contracts for sale. Some of the fundamental aspects are verifying sales income, gross margin and net profit, which can readily be compared with data extracted from banking records, POS reports and supplier statements. In the cases I referred to, the annual financial statements painted a picture that appeared to be too optimistic compared with the other business records. This may have been avoided had the seller and/or their advisers taken more care in completing the annual reports. If all the checks and balances had been completed earlier (ie, before the reports were first prepared or the pharmacy offered for sale) then the disappointment could have been avoided. By the time the proposed purchase reaches the due diligence stage, both sides have already invested significant time, effort and expense. So, for the sale to be delayed, renegotiated or cancelled is frustrating exercise. When collating records for your year- end reports for this financial year, pay extra attention to the following areas as at June 30: • Value of stock on hand, separating the value of obsolete/outdated inventory. • List of unpaid suppliers with values, including forward charge stock. • Customer accounts, especially nursing homes. • PBS claims owing. • Identify the proportion of sales and gross margin from dispensary and front of shop, as well as specialty areas such as compounding or high-price drugs. These items can have an enormous impact on your gross margins and net profit, so give them attention. Especially if you’re planning to sell your pharmacy in the next few years. Consult with a specialist accountant well before you market your business for sale and obtain relevant advice, as it may have a huge impact on the eventual result. BUSINESS THROUGH INNOVATION FINANCE 37 By Neil Featherstone. Director Pinn Deavin Neil Featherstone is a director of Pinn Deavin, a leading accounting, management consulting and investment firm. Neil has been advising pharmacists since 1984. Inquiries: neil@pinndeavin.com.au or 02 8525 3700. Accountants specialising in Pharmacy www.pinndeavin.com.au Neil Featherstone (02)85253700 Neil Featherstone 30x190.indd 1 2019-1-11_PinnDeavin_StripAd_Proof.indd 1 19/1/05 8:38:24 AM RETAIL PHARMACY • AUG 2020 11/1/19 1:26 pm