The second article in this year's business focus series looks at the financial services available to pharmacy businesses
Banks and other financial services providers can offer pharmacy businesses traditional business advice and a wide range of financial products
In just over 10 years, the business of banking has changed dramatically. One of the most significant changes is that banking is now generally referred to as being part of the financial services industry. Its business now includes the selling of a wide range of insurance products. Such is the complexity of the business, clients of companies offering financial services can face a real dilemma: (a) what products are available, (b) which companies provide them, and (c) do they represent good value for money?
To complicate matters further, banks (unlike pharmacies) have, in normal circumstances, no duty to give advice (Redmond vs Allied Irish Banks 1987). The moral here is that if you do not ask for guidance then generally bank staff do not volunteer information; however, if the client asks specific questions then clarification should be provided.
Services offered by financial institutions can be split into traditional business advice and financial services advice.
Good bank managers understand basic accountancy and will request a copy of annual accounts, even if the corporate customer is not borrowing from the bank. They will be genuinely interested in your business. They should visit the business's premises at least once a year.
The manager will study the profit and loss account and balance sheet, and when previous years' figures are available, make comparisons. One always hopes the figures will show improvement, but at times this is not so. In either case, independent comment about the data should be helpful. Some areas where advice might be provided are:
Stock control Can stock holdings be reduced without damaging sales? This is important when a business requires an overdraft because, generally, every £1 borrowed can cost in the region of 10p per annum in interest.
Breakeven What is the business's breakeven figure? A basic formula is
Overheads/Gross profit margin x 100 = breakeven
so, for example,
£20,000/25% x 100 = £80,000
Is breakeven improving or worsening on a monthly and annual basis? What are the reasons? A bank manager with a few clients in the same line of business may be able to discreetly question why certain figures for client A are as they are, when it is known that for Clients B and C the figures show something else.
Current accounts These are fairly standard throughout the industry. Despite providing a cashier service, banks do not like handling cash as it costs them money to hold. Consequently, they charge a fee of about 50p per £100 to accept cash with a credit. Building society accounts could provide an alternative, but check first that they do not charge for this service.
Most banks waive the standard service charge fees for businesses in their first year of trading, and have a sliding scale of fees in the subsequent two to three years. Such is the competition between banks, clients could well negotiate a better deal by shopping around. This can be achieved by providing a potential bank with figures for the likely usage to enable it to calculate a fee.
To do this, take the fees charged by the current bankers (clearly marked on the account bank statements); additionally the volumes of cash and number of cheques collected will be required, together with any other non-standard service used. Generally, banks have the means to levy fees in two ways; the published standard business tariff or a personalised tariff based on either a turnover or per entry basis. If the client negotiates the business off the basic standard service, a saving may be achieved.
It should be remembered though, that if a transfer is made to a personalised tariff, one could end up paying more than was necessary. This might happen if the way in which the banking service was being used changed significantly, such as through reduced volumes of cash being paid in.
Savings accounts Financial institutions are notorious for introducing new accounts to attract new business while leaving existing clients in older style accounts, which provide the saver with smaller benefits. It is worth studying the broadsheet papers on a Sunday, most of which have money sections, for prevailing interest terms. Make sure the account you have is as good, or as near to as good, as those shown.
Unsecured loans Consider whether it would be better to move to a secured type loan to enjoy cheaper finance as unsecured loans are often more expensive. That said, there have been many new entrants to the lending market. By shopping around some excellent deals can be obtained. Competition is strong for short-term loans (ie, repayments up to 60 months in total). Last month, Tesco was offering fixed rate personal loans from 8.9 per cent annual percentage rate (APR). Morgan Stanley Dean Witter's credit card balance transfer offer of 3.9 per cent APR, albeit only applicable for five months, was another low rate. Though these are aimed at the personal market, finance could be used by a sole trader to assist the business indirectly, such as for purchasing a car.
Secured loans Most of the main financial institutions offer professional loan schemes to help professionals establish, or develop, a business. For the pharmaceutical profession, for example, Barclays currently offers a scheme in conjunction with Unichem Ltd to assist pharmacists to finance the purchase, or refurbishment, of either a freehold or leasehold pharmacy premises. The minimum loan is £25,00, with no maximum loan limit, for up to 20 years on freehold property or 10 years for leasehold. A capital repayment holiday (ie, a deferred start to repaying the loan) can be granted provided this is requested by the borrower at the outset. The business's general banking business must be placed with Barclays and, as Unichem provides guarantee support, purchases from Unichem must account for 75 per cent of the pharmacy's annual purchases.
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Business loans can be used for the refurbishment of pharmacy premises |
Hire purchase (HP) If financing a capital asset by way of a traditional bank loan is too expensive, hire purchase may offer a solution. For example, instead of a loan for £10,000 over three years, HP could provide a £10,000 asset with repayments of £6,000 over three years, the borrower refinancing £4,000, plus any accrued interest, at the end of the term.
Leasing With leasing, the client has use of a capital item, ownership remaining with the leasing company. Types of lease range from the client having full responsibility for maintenance to the other extreme where the leasing company offers a full maintenance contract.
Accountants (and sometimes a well trained banker) should be able to advise their clients which method of financing a capital purchase is the best for them. The system used is that of discounted cashflow and aims to calculate the real present value of money for the different projects. From the example given in Table 1 (below), using a 10 per cent cost of finance, a cash purchase would seem to be the cheapest option, assuming cash was available. However, an accountant would also have to build into the calculations tax allowances, maintenance costs, etc, which could affect the final outcome.
Table 1: discounted cashflow analysis |
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| Purchase method | Year | Purchase price (£) | Discount factor | Present value (£) |
| Cash | 0 | 50,000 | 1.000 | 50,000 |
| HP | 0 | 26,000 | 1.000 | 26,000 |
| 1 | 13,000 | 0.909 | 11,817 | |
| 2 | 13,000 | 0.826 | 10,738 | |
| 3 | 13,000 | 0.751 | 9,763 | |
| Total | 58,318 | |||
| Leasing | 1 | 20,000 | 0.909 | 18,180 |
| 2 | 20,000 | 0.826 | 16,520 | |
| 3 | 20,000 | 0.751 | 15,020 | |
| 4 | 20,000 | 0.683 | 13,660 | |
| Total | 63,380 | |||
Merchant services This is the receiving of payment by debit and credit cards. Many shops now use electronic systems for obtaining payment with debit and credit cards. It is fast, efficient and safe. However, just because you bank with one institution, it does not mean you have to purchase all your banking services from it.
Telephone banking These services are provided through banks' call centres, not the branch network. Call centres are generally open 365 days a year, 24 hours a day. Examples of the services are balance inquiries, ordering statements, checking or amending standing orders, cancelling direct debits, stopping cheques, ordering foreign currency, arranging transfers between accounts, paying credit card bills, and so on. These banking needs can be dealt with outside the client's own business hours.
Internet banking Similar service to telephone banking, but a computer and modem link are required to contact the bank. It also allows clients to search the wide range of financial products available, including, for example, organising a personal mortgage. By visiting other banks' web sites it is easier to make comparisons of the charges made and services offered.
Pay service The benefits of this to a business depend on the number of staff employed, but it could be of assistance to a busy proprietor. Services range from a basic transfer of funds and issuing of pay slips, according to instructions from the proprietor, to a full service that calculates pay according to wage tables and hours worked, and the issuing of all the statutory paperwork.
Two types of insurance are available, general and life cover based. Life cover insurance can be purchased from two types of supplier, tied or independent advisers.
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Useful addresses
If you need to complain to a bank or building society first write to the branch manager, then the head office. If the matter is still not resolved to your satisfaction you could contact one of the following:
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Keyman insurance This is a policy which provides options for a range of cover, based upon the requirements of the policy holder(s). It can include life cover, paying out in the event of the death of key business members to allow the business to continue to be operated pending sale, or indeed to allow the winding up. In addition, sickness cover to pay for additional staffing pending the recovery of key members of staff can be included.
Life cover This is generally arranged to cover loans so that in the event of the death of the business owner, the beneficiaries are not put under further pressure through the need to find some way of clearing debt.
Permanent health insurance Designed to produce income to cover personal expenditure, in the event of illness. The policy holder can elect to have payments commencing after one, three, six or 12 months of illness. A deciding factor will be the amount of savings an individual has to meet the on going expenses of the business and personal living expenses, pending recovery. Clearly the longer the deferment period the cheaper the policy will be. The amount of cover required and general health of the individual would also affect the premium. Government figures for 1996 suggest that 1.19m workers are unable to work for periods of between three and 15 years.
Critical illness Figures quoted by HSBC Plc last year were that one in four males would suffer a critical illness by the age of 60 and one in five females by the age of 65. This type of policy pays out a pre-agreed sum should the policy holder subsequently be diagnosed with a life threatening disease such as heart problems or cancer.
Medical bills The National Health Service provides care to the sick, but at times waiting lists can be a problem. For this reason people take out private health insurance. "Instant" treatment can be particularly important to sole traders and small businesses where the continuation of a business could be severely affected by the illness of key individuals. The age and health of the policy holder(s) at proposal stage together with the type and location of hospital chosen, and level of cover required determine the cost of the insurance. Some firms charge lower premiums if the policy holder elects to pay a percentage of the bill. While this might sound attractive, it is perhaps wise to consider policies that do not place such a burden on the policy holder, as the excess has been over £10,000 in some cases.
Hospital plans Here the policy holder receives money from the insurer if they are hospitalised. The funds can be very useful in covering the extra costs of being ill, eg, temporary child care during visiting hours, transport for family to visit, etc.
Savings Instead of placing funds in a savings account, alternative recommendations can be made based upon the requirements of the saver. As the performance of companies varies from time to time, there is a legal obligation for industry tables to be produced. Firms are grouped in quartiles. Experts in the industry suggest that firms should be researched well by a prospective saver, and as an aid in selecting a company, they should review those firms who have been in the top quartile for the past 20 years. Past performance does not guarantee future performance, but in the absence of other useful data, it is worthy of consideration.
Bonds These can be for the short, medium or long term and carry a risk of loss of capital, if equity based and not guaranteed, in the event of a collapse in the stock market. It is vital the saver fully understands the terms of the policy. If in doubt, defer signing documents until comprehension is clear and the terms are acceptable to the saver.
Pensions Pensions should be started as soon as gainful employment is undertaken and contributions reviewed regularly. Company schemes are generally best for an employee, but always seek professional advice. If the contributions made by employer and employee are insufficient to produce the desired pension, an employee can make additional voluntary contributions up to certain legal maximums.
Taxation Most banks have taxation departments, however, from a client's point of view, using a local accountant can be more helpful.
Executor and trustee It is very important to make a will, where an individual has assets. It is especially important where there are dependants and there is the issue of guardianship to consider until the children reach the age of majority. Banks can offer an executor and trustee service but tend to be expensive. The main advantage is that, unlike some small firms of solicitors, a bank as a legal entity should be around forever.
For help in selecting companies to use, articles in financial publications such the money pages of daily and weekend national newspapers and periodicals such as Money Management or Personal Finance can be valuable. However, as the market is complex, individuals should obtain professional advice before entering into transactions relating to life insurance, pensions and savings.
A wide range of financial products is available to pharmacists and their businesses, supplied by a large number of organisations. In order to achieve value for money it is vital to shop around. Research products being offered in detail. Look at the costs, benefits, exclusions and small print. Never buy the first product identified, no matter how tempting, unless you have done your research and know this is the best one for you. Always read all the small print. Ask questions of the company providing the product. How clear are the answers? Are the answers supported by the documentation? If not, will the company confirm in writing? (If not, why not?) Be satisfied you know enough about the company you are buying from, especially on the internet.
Never sign any documents until you are confident that it is the right product, at the right price, with the right benefits for you, your family or your business.