Managing the financial arrangements for partners in a partnership is mostly a straight-forward process. But often made complicated and messy by not paying attention to the financial arrangements between partners and the associated implications. If these are kept untidy they can potentially lead to disagreements later on, particularly when partners are exiting the business.
I am always a greater fan of things that are clear, straightforward and simple. My strongest recommendation is to keep your partnership financial affairs the same. The more complicated and “clever” people try to make things the more uncertainty there is. And uncertainty is not a great companion in financial arrangements. Let me go through some of the key arrangement you need to consider;
Partners Salaries
Partners who are rostered on as pharmacists need to be treated like an employee of the business. Some are also paid a salary for being the working partner, reflecting the additional hours they invest in managing the business. They need to be paid a wage accordingly and that wage needs to be reflected as an expense of the business. The resulting profits are then an accurate reflection of the profitability of the business and are then distributed according to the respective equity percentages.
It should be agreed amongst the partners what the hourly rate is. Whether that is at pharmacist rates of say $50 per hour, or at a higher rate to reflect the partners skill and expertise is up to the partnership to decide.
I sometimes see partners salaries reflected as a drawing in the partners equity accounts which is clearly wrong. What happens here is the associated partners equity balances are then all out of whack and the profitability of the business incorrectly reported. Then 5, 10, 15 years down the track when it comes to a partner exiting the business, determining the equity balancing payment, can be extremely difficult to reconcile accurately.
Drawings
The concept of drawings is quite simple. If two partners have an equal interest each in the partnership, then the drawings should be equal. And they should be reflected in each partners equity account. Reconciling partners equity balances at the end of each year is then an easy matter.
But often partners complicate matters unnecessarily. For example;
1. One partner wants to run motor vehicle expenses through the business.
2. One partner wants to have super contributions paid.
3. One partner wants profits paid as a consulting fee.
You get the idea. A partner wants to make arrangements for his/her own individual benefit, however resulting in inequities in the financial reports of the partnership.
My view here is again keeping things simple. Drawings are paid in accordance with your respective ownership interest as a cash transfer to the partners bank account. What you do with that after that point is up to you.
A drawings policy should also be agreed to and adopted early on. This is what I would suggest:
1. Drawings are paid monthly of $x per month based on the partners % interest in the business.
2. The quantum is determined at the beginning of each financial year by reference to what is affordable for the businesses cashflow needs.
3. A review is undertaken once or twice a year for any additional drawings “top-ups”.
4. If capital needs to be introduced, then again this should be in proportion to the respective percentage interest in the business.
5. If only one partner is injecting capital into the business then this should be disclosed separately in the balance sheet as a liability.
Determine a drawings policy, have it agreed to, documented and implemented. Above all keep it simple and equitable.
Store Accounts
At Peak we find the easiest way of dealing with store accounts is to have to partners clear their respective accounts. Sometimes these are cleared via drawings accounts, but again this will lead to inequities in the partners accounts.
Annual Reconciliations
Often partners accounts can become out of balances for a whole variety of reasons despite having strong policies and practices in place. We find best practice is to ensure the partners equity accounts are reconciled annually by the business accountants and amounts squared up.
If this practice is followed, then there are no surprises or disagreements at a later point in time. Particularly when partners exit because of a dispute.
Priya wrote another article earlier about partnerships which I would suggest you read. It covers Pharmacy Business Partnerships, here’s what you need to know.
The main message I want to get across here is to make sure your equity arrangements with your partners are kept simple, equitable and reconciled regularly. If your equity balances are a mess, now is a good time to make sure they are investigated and reconciled. Reach out to myself or Priya Narsing and we can help.