Finances - Part 2

Question 1

Cash Flow Statement

Answer 1

● Cash flow from operating activities (+)
● Cash flow from investing activities (+/-)
● Cash flow from financing activities (-)
● Net change in cash position

Question 2

How to improve cash flow?

Answer 2

● Get paid fast - free up cash
● Pay as late as possible
● Minimize inventory (closely monitor)
● Cautious of “capital” spending - planned / properly financed - big expenditures spread out over time
● Minimize dividend payout - money coming out of pharmacy, equity lvl goes down, money goes to sharholders
● Longer amortization on loans

Question 3

Income Statement Analysis

Answer 3

● Gross Profit (Revenue - COGS)
● Gross Margin (GP / Revenue)
● Net Profit (Revenues - Expenses) - before tax
○ 2020 Canada Average = $123K or 9.2% of sales
● Operating Expenses
○ Wages (12-14% of sales or 45-50% of gross profit)
○ Occupancy (1-3% of sales or 10% of gross profit)
○ Other expenses (6-9% of sales or 20% of gross profit)

Question 4

Liquidity

Liquidity - Can the business meet its short term debt obligations?

Answer 4

Current Ratio = Current Assets / Current Liabilities
● Higher = better
● <1 = insolvent (leading to bankruptcy?)
● Too high = not maximizing use of current assets\

Quick Ratio = Current Assets (minus inventory and prepaid expenses)

Current Liabilities

● Can the pharmacy pay its bills?
● Typical goal is a 1:1 ratio

Question 5

Number of Days of Accounts Receivable

Answer 5

of days of AR = (Accounts Receivable / Total Revenue) * 365

● Lower value is better

Sales: $1,324,500
● AR: $180,000
# of days of AR = (Accounts Receivable / Sales) * 365
# of days of AR = ($180,000 / $1,324,500) * 365
# of days of AR = 49.6 days

Question 6

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Answer 6

● Calculate prescription (Rx) inventory and front store inventory values
separately
○ COGS - Income Statement
○ Inventory - Balance Sheet
● Goal: Rx = close to 12 / FS = 7 to 8

Question 7

Number of Days of Inventory = (Inventory Value / COGS) x 365

Answer 7

● Calculate prescription (Rx) inventory and front store inventory values
separately
● Goal: Rx = 30 days / FS = Varies - typically 45-60 days

Question 8

Leverage

Answer 8

Debt to Equity Ratio = Total Liabilities / Equity
● From the Balance Sheet
● Leverage - measurement of debt to shareholder equity
● The higher the number, the more of the business that is financed by creditors
debt
○ High Risk (>2)
○ Low Risk (<1)

Question 9

Analysis (GPROI)

Answer 9

Gross Profit Return on Inventory (GPROI) = (Gross Profit / Inventory) * 100

Goal: $2 profit for every $1 of inventory - 200%

Question 10

Analysis
Return on Operating Assets =
Normalized Net Income (before taxes) / Operating Assets x 100%

Answer 10

● Net Income from Income Statement
○ Normalized = Make adjustments to reflect “true” income and expenses for the business if it ran
without the “owner’s” involvement
○ Remove any investment income, long term interest expenses
○ Ensure expenses meet market rates (e.g. owner’s salary adjustment)
● Operating Assets from Balance Sheet
○ Remove any assets not linked to the operation of the business

Question 11

Return on Equity =

Answer 11

EBITDA / Equity x 100%
● Income from Income Statement
● Shareholder’s Equity from Balance Sheet
○ Include Retained Earnings
● The higher it is the better

Question 12

Income Taxes

Answer 12

● 3 types of business “set-ups” in Canada
○ Sole Proprietor
○ Partnership
○ Corporation
■ Creates its own identity
■ Run by a Board of Directors
■ Shareholders own shares (equity) within the corporation
■ More extensive rules / reporting / costs of operation BUT is a stand alone entity

● Sole Proprietor and Partnerships are “taxed” on their operations as a “person”
● Corporations are taxed as their own entity - different tax rates than personal
income taxes

Question 13

Corporate Income Tax

Answer 13

● Federal corporate income tax rate: 38%
○ 10% abatement (does not apply to income earned outside of Canada)
● Canadian-controlled private corporations eligible for small business deduction
○ 9% federal / 2% AB (2022) - for the first $500K net profit
● Canadian-controlled private corporations
○ 15% federal / 8% AB (2022) - after $500K net profit

Question 14

Monitor Your Business

Answer 14

● Income statement (monthly)
● Balance sheet (monthly)
● Ratios (monthly)
● Compare to budget (monthly)
● Rectify issues (ASAP)