SERIES: Master The Margin Episode 2: Understanding the Balance Sheet: A Snapshot in Time
The Balance Sheet: A Snapshot in Time in how your pharmacy is financially from an asset, liability, and equity perspective.
In this episode of Master The Margin, Scotty Sykes, CPA CFP® and Kathy Blanchard, Senior Pharmacy Accountant build on the foundational principles (fundamental accounting) discussed in their inaugural episode by exploring the balance sheet!
Join Scotty Sykes, CPA, CFP®, and Kathy Blanchard, Senior Pharmacy Accountant explore:
- The formula “Assets = Liabilities + Equity”
- Its significance in providing a snapshot of a pharmacy’s financial health
- Common assets you’ll find on a pharmacy’s balance sheet
- The importance of tracking current assets
The Master The Margin Podcast Series is your go-to series for independent pharmacy accounting and tax topics.
In this series, we dive deep into understanding your balance sheet, profit and loss statements, key performance indicators, tax advantages, and more.
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More resources about this topic:
Podcast – Independent Pharmacy Accounting Fundamentals
Blog – Fundamentals of Pharmacy Accounting
Presentation – Fundamentals of Pharmacy Accounting: Navigating 2024 and Beyond
Podcast – Tackle Independent Pharmacy Accounting
Video – The Fundamentals of Pharmacy Accounting
If you prefer to read this content, the video transcript is below:
Scotty Sykes, CPA, CFP®: And good morning everybody to another episode of Master the Margin, where we talk about pharmacy accounting and tax topics. And Kathy, this is really, I was thinking about it over the weekend while we were at Amerisource and you were at Cardinal trade shows, where there’s really going to be unlimited topics to talk about on this podcast. There’s just so many. But piggy backing off of our inaugural episode, Fundamental accounting which is going to be the theme throughout this whole series because without that a lot of the things we talk about is impossible or not gonna happen. So fundamental accounting is something you’re gonna hear quite a bit every episode probably But piggy backing off of that Kathy we’re gonna hit on the balance sheet and The balance sheet is a snapshot in time. There’s a formula to the balance sheet. Kathy what’s that formula?
Kathy Blanchard, Senior Pharmacy Accountant: Assets equals liabilities and equity.
Scotty Sykes, CPA, CFP®: Plus equity. And that is the first thing they teach you in accounting class is that formula there. And so, the balance sheet really is the fundamental piece to the whole accounting system, to the business. And again, it’s that snapshot in time of where you are from an asset perspective, liabilities and equity perspective. And if we talk about the assets, are some, Kathy, let’s go through some of these common assets that a pharmacy may see on that balance sheet.
Kathy Blanchard, Senior Pharmacy Accountant: So, if we start at the top of the balance sheet, you end up with your cash, your savings accounts, any cash on hand, you know those fluid, those liquid assets. And then we work our way down to current assets, which is any receivables. And when we talk about receivables in pharmacy, we’re talking about your customer store charges, your third-party receivables from your adjudicated prescription claims. And don’t forget if you have med billing in your facility that that’s another receivable that we need to be reflecting on your balance sheet. We need to know how much is outstanding on the med billing side. Any employee loans, course inventory, which is what’s behind the bench, plus anything that you have out front. And don’t forget the inventory that you have stashed in the back room, that seasonal stuff that either you haven’t brought out or the inventory that you’re staging seasonally for Christmas or Thanksgiving or whatever to come. And then of course you have your fixed assets, your shelving, your furniture, computer equipment, printers, robots, and less accumulated depreciation because you can’t expense those items the minute you buy them. You have to expense them over what the IRS allows as their usable life. And then directly below that sometimes you have stock or membership equity in your buying group or Goodwill where you’ve bought your script files from another pharmacy and those are amortized over 15 years. Did I hit everything?
Scotty Sykes, CPA, CFP®: You hit them all. Another thing to pick up is you mentioned receivables. Another area of receivables that you may miss because you have separate NPI numbers, I believe, or NCPDP, I get those two mixed up but is the receivables from a combo shop long-term care. You need to make sure that you’re also getting those receivables because they may be tracked separately.
Kathy Blanchard, Senior Pharmacy Accountant: They are tracked separately.
Scotty Sykes, CPA, CFP®: Yes. And so, you need to make sure you’re tracking those. You mentioned depreciation and those fixed assets, vehicles, robots, improvements, if you have to do USP 800 improvements or something like that. Those are all fixed asset items that are, as Kathy mentioned, written off over a period of time. There are tax selections that allow you to write those off quicker than normal depreciation rules with the IRS and we’ll probably get into all that in another episode, but, what’s
Kathy Blanchard, Senior Pharmacy Accountant: Well, wait a minute, you missed one. We both missed it, the building. If you own the building, the building is a fixed asset and you can possibly do a cost segregation study to depreciate that faster than the 39 years that most accountants depreciate it at.
Scotty Sykes, CPA, CFP®: So typically, you don’t see a building inside of a pharmacy. And I believe that’s gonna be a whole other episode just on that topic, building cost segregation study.
Kathy Blanchard, Senior Pharmacy Accountant: Fun.
Scotty Sykes, CPA, CFP®: But that can be an asset on the fixed assets. And then you have those other assets that you mentioned, Kathy, goodwill, the equity in your buying group, whatever other assets you may have. One other thing I want to mention is that you have all these assets, they have kind of different categories, fixed assets, other assets. You want to make sure that you’re tracking those current assets. The current assets are assets that typically can turn into cash within 12 months. So, a broker account, let’s say you have a broker account where you’re putting excess money into bonds or something, that can be liquidated most likely in a short period of time and turned into cash. So, that would be a current asset. Inventory is a current asset. That’s going to turn into cash, hopefully within 30 days or 15 days. Receivables is a current asset. You hopefully collect it in 20 days, 21 days. Your cash obviously is a current asset. Having those current assets categorized correctly versus your other assets is important because as we get down the road here and get into KPIs and metrics and performance measures, you need to be able to categorize those correctly.
Kathy Blanchard, Senior Pharmacy Accountant: Yep.
Scotty Sykes, CPA, CFP®: And so that would, I guess Kathy, wrap it up on the asset section at this time. I’m sure we’re going to deep dive into each kind of more of these in particular, but just starting with the balance sheet and what we’re looking at, you got assets equals liabilities plus equity. Those are your assets you need to be paying attention to. I appreciate everybody listening in and we will see you on another episode!
