Managing the pharmacy finances

Managing the pharmacy finances

If you have recently opened a new pharmacy, taken over a pharmacy, or have been running one for a while and would like to get a better handle on the finances, this month’s insights are for you.

MACO invest

Getting to grips with the books

In today’s world with everyday life becoming more digital and interactive, managing your accounts and tax is no different. The online cloud accounting environment is growing exponentially with a range of programs, add-on’s and apps available to assist you in streamlining your pharmacy business and its operations.

The flexibility of use, ease of information available and all-round slicker delivery puts cloud software miles ahead of the more traditional desktop versions and endless spreadsheets.

Cloud accounting systems can be accessed anywhere (the pharmacy, at home, on a train or even on the beach if you can’t switch off…) and simple tasks like creating and sending invoices, matching payments and reconciling your bank can be done by a few clicks on your smartphone or tablet. You should speak to you accountant about the best package and apps for your pharmacy.

Ensuring that you have the bookkeeping in hand is often overlooked when setting up and growing the pharmacy (especially if you have little financial knowledge) but this is one of the key controls that should be implemented from the outset – either completed internally or by engaging a bookkeeper.

Compliance

Running a pharmacy brings with it a certain amount of compliance in terms of the accounts and tax. Company accounts require to be submitted to Companies House within 9 months of each financial year end. HMRC also require payment of Corporation Tax in the same 9 month period. Your accountant will generally prepare and submit these on your behalf.compliance

Your accountant should also meet with you to develop your tax planning strategy taking into account your business, personal and family circumstances – it’s never too early to consider inheritance tax (IHT) and creating a tax plan for your life (and beyond).

Decisions made during your working life can leave your loved ones with a larger IHT bill than may have been necessary.

Further HMRC compliance is also required in relation to PAYE/NI and VAT on a regular basis. The government’s directive that all companies offer workplace pensions brings an additional compliance burden upon pharmacy owners both from a financial and admin perspective.

Managing cash and controlling costs

Cash flow will be the biggest challenge when opening a new pharmacy. Unless you are in the fortunate position of having a significant amount of capital to invest, managing the cash position of the pharmacy could be the main task as the pharmacy grows.

Some suppliers may not offer you favourable credit terms in the early stages until you build up a payment history with them. So, it is important that cash movements are forecasted as much as possible to ensure that the pharmacy is operating within its means.

Review costs on a regular basis to ensure that you are not overspending and look for areas where you can actively reduce costs – all this will go towards effective cash management.

Ideally, you should be thinking at least 6 months ahead in terms of operational activity and planning to ensure that all cash commitments can be met in line with expected sales etc. It is also worth considering a ‘safe’ balance in your pharmacy i.e. what is the level of cash to be retained at any one time. This safe balance should be enough to cover short term commitments like payroll should activity not go as planned.

Measuring performance

It’s important for pharmacists to understand the numbers side of the business so that they can gauge whether or not they are making good returns. As with all retail businesses, pharmacy owners need to recognise and be alert to trends and learn when to make changes to their operations and strategies. 

NHS income should be monitored monthly and will highlight whether the pharmacy’s volume is expanding or contracting. There will be certain trends in, for example, the winter months. It is also useful to look at the sales to payroll ratio and your gross profit %. The latter measure reflects the % of every £1 of sales that is available to cover your overheads, interest and depreciation.

Return on assets / capital employed – are all of your assets supporting sales? Your premises, IT equipment and in-store furniture should all be supporting sales. This measure calculates what return you are generating from the assets and capital you have invested in the business. You should set a target each year and measure progress against it.abacus

And finally, taking the regular temperature of your pharmacy’s financial health is a must, especially if you are looking to raise external funding. Lenders will look at a range of financial criteria to determine whether or not you have a stable business and to assess your ability to repay.

The Quick Ratio is used to determine how many times the pharmacy can immediately cover its liabilities and is an indicator of the pharmacy’s financial stability. The measure is calculated by dividing your total current assets by total current liabilities.

Your accountant should be reviewing these and a few additional key measures with you on a regular basis. If you choose to go with one of the cloud accounting packages, a great deal of the above is automatically calculated and graphically presented thereby enabling you to keep an eye on the pharmacy’s key numbers, trends and, ultimately, your business success.

This article was first published in Scottish Pharmacist October 2017.