NATIONAL COMMUNITY PHARMACISTS ASSOCIATION

Overview of Financial Statementsand Performance MeasuresFinancial StatementsThe information gathered in the survey is summarized andpresented in three basic statements:n Common-sized income statement—percent of total salesn Median financial benchmarksn Common-sized balance sheet—percent of total assetsWhat Is A Common-Sized Statement?Common-sizing financial statement information is aprocess by which each item on the financial statement isreduced to its relationship to the whole statement. Forexample, the average balance sheet presents each balancesheet item as a percentage of total assets. The averageincome statement presents each item as a percentage oftotal sales.The average common-sized statement is computed by determiningan average value for the entire group of respondents.For example, when computing the average balancesheet, the cash balance of each pharmacy was totaled, andthe assets of each pharmacy were totaled. Then total cash isdivided by total assets to arrive at an average percentage oftotal assets for cash. Each item on the balance sheet gets totaledseparately and its percent of total assets is computedin this manner.The result of this process is an average common-sizedstatement. Average values can be affected by one unusualpharmacy. This possibility should be considered when usingaverage common-sized statements in the analysis process.Since each number is calculated separately as an average,the subtotals may not add up to the sum of the detailsdue to rounding. This applies to both the common-sizedincome statements and the common-sized balance sheets.Common-Sized Income StatementThe income statement, also referred to as the profit and lossor P&L, measures the results of operations for a specificperiod of time (one year). The key financial issues relatingto the income statement are pricing, gross margin maintenance,staff costs control, and operating expense control.The common-sized income statement displays each item asa percentage of total sales. By focusing on the relationship tosales, this statement shows how much of each sales dollar isspent on the various expenses.For example, where cost of goods sold are 73.9 percent forevery $1.00 in sales, about 74 cents (73.9 percent of $1.00)is spent on costs of goods, leaving 16 cents in gross profitto cover all other expenses and any profit for the owner.By using this average income statement, pharmacies withdifferent sales volumes can be evaluated for profitability andexpense control in common-sized or comparable terms.Median Financial BenchmarksFinancial statement information can be used to measurethe health and progress of a business and the efficiency ofits financial management. These measurements are quantifiedin standard financial benchmarks.A ratio is simply a comparison of one number to another.By comparing certain numbers from the financial statements,key financial issues can be evaluated, such as: a)efficiency in generating sales from assets, b) efficiency ingenerating profits from sales, or c) efficiency in structuringliabilities and net worth. For definitions and explanationsof the financial operating ratios presented in thisreport, refer to the Guide to Benchmarking. The guide isspecially designed as an educational companion piece tothe 2009 NCPA Digest, sponsored by Cardinal Health. NCPAmembers can download a copy of the guide by visiting theNCPA website at www.ncpanet.org.The median is determined by computing the ratio for eachpharmacy, and the results are ranked in order from highestto lowest. The ratio that falls in the exact middle of the listis at the median. The median is preferred to an averagevalue, since it is not distorted by a few unusually high orlow values.Median ratios are useful management information becausethey designate the “half-way point” of the respondents. Comparingan individual pharmacy’s ratio to the median revealswhether its performance places it in the top or bottom halfof the sample for the specific condition being measured.Overview of Financial Statements and Performance Measures41