Question

Bluffton Pharmacy

Two New Pharmacy Owners Learn Valuable Lessons About Financial Statements and Analysis

It has been a little more than two years since Angela Crawford and Martin Rodriguez purchased the Bluffton Pharmacy from Frank White, the previous owner and founder, who had started the pharmacy in 1969. The two have spent many long hours in the store and have learned many valuable lessons as business owners that they had not had the opportunity to learn as employees of large chain pharmacies where they had previously worked.

Crawford and Rodriguez just received an e-mail from their accountant that contained the balance sheet and the income statement for Bluffton Pharmacy for the fiscal year that has just ended. The two financial statements appear below.

Bluffton Pharmacy
Balance Sheet, December 31, 20XX
	Assets
Current Assets
Cash	$74,473
Accounts Receivable	$112,730
Inventory	$224,870
Supplies	$ 21,577
Other Assets	$ 10,202
Total Current Assets	$443,851
Fixed Assets
Autos, net	$ 33,156
Equipment, net	$ 35,706
Furniture and Fixtures, net	$ 16,323
Total Fixed Assets	$ 85,185
Total Assets	$529,036
	Liabilities
Current Liabilities
Accounts Payable	$29,585
Notes Payable	$70,902
Line of Credit Payable	$32,136
Total Current Liabilities	$132,623
Long-term Liabilities
Note Payable	$170,880
Loan	$93,346
Total Long-term Liabilities	$264,226
	Owner’s Equity
Crawford and Rodriguez, Capital	$132,187
Total Liabilities and Owner’s Equity	$529,036

Bluffton Pharmacy
Income Statement December 31, 20XX
Prescription Sales Revenue		$2,228,767
All Other Sales Revenue		$ 167,757
Total Sales		$2,396,524
Cost of Goods Sold
Beginning Inventory, 1/1/xx	$ 169,578
+ Purchases	$1,938,097
Goods Available for Sale	$2,107,675
- Ending Inventory, 12/31/xx	$224,870
Cost of Goods Sold		$1,882,805
Gross Profit		$513,719
Operating Expenses
Utilities	$10,305
Rent	$35,948
Advertising	$9,586
Insurance	$9,586
Depreciation	$5,033
Salaries and Benefits	$321,134
Computer and E-commerce	$11,983
Repairs and Maintenance	$28,758
Travel	$4,793
Professional Fees	$3,595
Supplies	$5,991
Total Operating Expenses		$446,712
Other Expenses
Interest Expense	$24,879
Miscellaneous Expense	$374
Total Other Expenses		$25,253
Total Expenses		$471,965
Net Income		$41,754

To see how their pharmacy’s financial position has changed since their first full year of operation, Crawford and Rodriguez want to calculate 12 financial ratios. They also want to compare Bluffton Pharmacy’s ratios to those of the typical small pharmacy in the industry. The table below shows the value of each of the twelve ratios from last year and the industry median for small pharmacies.

Ratio Comparison
Ratio	Bluffton Pharmacy		Pharmacy Industry Median*
	Current Year	Last Year
Liquidity Ratios
Current ratio		3.41	4.71
Quick ratio		1.72	2.42
Leverage Ratios
Debt ratio		0.70	0.62
Debt-to-Net-Worth ratio		2.23	2.1
Times Interest earned ratio		3.04	3.9
Operating Ratios
Average Inventory Turnover ratio		10.90	11.7 times/year
Average Collection Period ratio		14.0	15.0 days
Average Payable Period ratio		5.0	14.0 days
Net Sales to Total Assets ratio		4.75	4.68
Profitability Ratios
Net Profit on Sales ratio		1.94%	2.9%
Net Profit to Assets ratio		9.20%	8.2%
Net Profit to Equity ratio		29.21%	48.0%
*from Risk Management Association Annual Statement Studies and National Community Pharmacists Association

“Let’s see how our ratios compare to last year’s numbers,” says Angela.

“I hope we’re headed in the right direction,” says Martin.

“There’s only one way to find out,” says Angela with a slight hint of tension in her voice.

Questions

1. Calculate the 12 ratios for Bluffton Pharmacy for this year.

2. How do the ratios you calculated for this year compare to those for the pharmacy last year? What factors are most likely to account for these changes?

3. How do the ratios you calculated for this year compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain.

4. Develop a set of specific recommendations for improving the financial performance of Bluffton Pharmacy, using the analysis you conducted in questions 1–3.

Answer 1

Ratios calculation for this fiscal year

1.Current ratio=Current assets/Current liabilities=$443851/$132623=3.34

2.Quick ratio=(cash +cash equivalents+accounts receivables)/current liabilities=($187203)/$132623=1.41

3. debt ratio=(total liabilities)/(total assets)=(short+long termliabilities)/total assets=($132623+$264226)/($529036)=0.5233

4.debt to equity ratio= (total liabilities)/(total equity)=($132623+$264226)/$132187=3.0

5. times Interest earned ratio=EBITDA/Interest expense=(Gross profit-Operating expenses+depreciation-other expenses+Interest)/(interest expense)=$71666/($24879)=2.88

6.Average inventory turnover ratio=(Cost of Golds Sold)/Inventory)=$1882805/$224870=8.37

7.Average Collection period ratio= Receivables/sales*365=$112730/2396524*365=17.16 days

8. Average payable period ratio=(accounts payable/COGS)*365=5.73 days

9.Net sales/Total assets ratio (asset turnover ratio)=Net sales/Total assets=4.21

10.Net profit on sales ratio=Net income/sales=$41754/($2396524)=1.74%

11. Net profit on assets ratio= Net income/Total assets=$41754/$529036=7.89%

12.net profit on equity ratio= net income/equity=$41754/$132187=31.59%

Almost majority of the ratios are underformed in comparision with the industry mean.

Company's performance has deteriorated this fiscal year when compared to last year. Its profit margins has come down leading to reduced times interest coverage ratio.

Its quick ratio also reduced to 1.41 which means its cash churnout from the current assets by not considering the inventory to pay the current liabilities has come down.

Company's inventory turnover also deteriorarted, which means it is taking time to convert the inventory into sales which is scary for the business in going forward.

Other ratios like collection period and payables period are also reduced and sluggish against the industry median. It is taking time to recieve the payments from the customer but paying the creditors before that which would lead to cash crunch in the business. To overcome this, comapny has to take short term funds which lead to further increase in the interest expenses.

Profitability ratios like net profit margins, return on assets and return on equity are also underformed against the industry median. It says that the operational and assets efficiency is low when compared to the median.

Its operational efficiency should increase by controlling the costs whih would improve the profititability ratios. It has to improve the inventory turnover ratio which helps to increase the sales during a year and has to negotiate better credit periods with the customers and suppliers. All these measures will the improve the profitability and at the same time cash in the business.