Think before investing (Pharmacy Today – February 2010)

Recently a number of pharmacies have been placed into liquidation. It has later been discovered that the owners’ involvement in other ventures has proven detrimental to their pharmacy business.

It can be tempting for the owners of a profitable pharmacy business to use the cash-flow and value of the pharmacy business either as security for other ventures or to fund negative cash-flow projects. One example is property development where there is often substantial cash-flow outlay until development is completed.

The risky nature of property development combined with the difficulty of raising additional bank finance has caused some of these developments to go bad. This has in turn caused the otherwise profitable pharmacy businesses to be put into liquidation as the financiers call upon the security to help settle the development debt.

If your core business is in a strong position, this is not a reason to go into new projects without research.

In some cases pharmacies have overextend themselves in a number of pharmacy ventures without implementing a core management structure. Often neglected is the detail of running a business such as filing tax returns on time and paying appropriate provisional tax. This can lead to large tax liabilities with accumulating penalties and interest. Stock levels are often not monitored adequately resulting in lost sales and customers. There is also a higher risk of employee fraud if adequate control is not implemented.

As with any business there is often a temptation for pharmacy owners to spend excessively without leaving enough cash in the business to cover its liabilities.

It is important to be sure there is enough money in the savings account to cover the next tax instalment before buying the new BMW! Pharmacists, like other business owners, have been known to take lengthy holidays, incurring the high cost of locums and risking the goodwill of the customers. This short-sighted behaviour can also endanger the business.

If you take on a project outside of the pharmacy or significantly expand your investment in pharmacy, this should be kept at a level that will not require personal guarantees or debentures over existing businesses.

If after all consideration and discussions it is decided to enter into a new investment project, it is important to get the ownership structure right to maximise tax benefits and asset protection. Again, your accountant and your lawyer can provide advice in this area.

Published by Andrew Millington, Jess Gilmour, Isea Morrison, Markhams Auckland in Pharmacy Today February 2010

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