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Accounting Gaffe Potpourri: The Not-So-Fabulous Final Five

May 12, 2023

sell your pharmacy

An article by Max Beairsto of EVCOR, and Mike Jaczko of KJ Harrison

When you are trying to sell your pharmacy business at the right price to the right buyer, mistakes in your accounting can work against you – and might even destroy a deal. In earlier blogs, we’ve discussed some of the more common types of accounting errors we find as pharmacy business transaction advisors.

But we’re not done yet! There are plenty of other accounting gaffes we often encounter when helping pharmacist-owners sell their pharmacy businesses. And while they don’t fall into any one particular category, they can still undermine or scupper your efforts to sell a pharmacy.

So, without further ado, here are the Not-So-Fabulous Final Five accounting mistakes to avoid:

1. Leaving “negative” margin in your dispensary records

This is a bit complicated, so bear with us. This mistake comes down to not resolving disparities between your dispensary records and your billing records. Sometimes, depending on the medication, a supplier will count as multiple doses a drug that the payor will count as a single dose. If a pharmacist or technician doesn’t notice (or doesn’t take the time to look for) the disparity between the two, they might end up recording multiple doses in the dispensary software and billing for multiple doses through the drug plan. Then the payor sees the bill, says ‘Hang on, that’s just one dose,’ and pays accordingly.

The transaction may be recorded properly in the pharmacy’s accounting software, but the dispensary software will usually not pick up the problem and show a negative margin. That is, it’s basically “eating” the disparity between cost and billing.

Why does this matter? Because a potential buyer will want to look at your pharmacy’s dispensary and accounting records. Any negative margin that doesn’t get cleared off the dispensary system could end up creating a much lower gross margin than the accounting books show. And that will trigger a red alert in the buyer’s mind. They won’t know which numbers to trust.

The solution is simple. On a regular basis, run a drug-by-drug gross margin report from your dispensary software and ensure you conform with the actual costs and revenue and don’t have a negative margin. Too many pharmacist-owners just don’t bother.

2. Not dating accounts payable

Some accountants (and many pharmacist-owners who keep their own books) consider only what the business owes right now as accounts payable. Many pharmacy wholesalers have “future due” lines that, in our experience, are not recorded in the accounts payable (AP). If you don’t, you are underestimating cost of goods (COG) and inaccurately overestimating earnings (EBITDA).

Remember, your goal is to give potential buyers as complete a picture as possible of your pharmacy’s finances. Not dating accounts payable at all or incorrectly falls short of that.

3. Not recording accounts receivable or accounts payable

It’s kind of unbelievable, but we see a lot of balance sheets that have no accounts receivable or accounts payable logged at all. If you don’t know how much money is coming in and how much is going out, then you are just guessing at what your business’s margin is.

As pharmacy business valuators, we can try to address this problem by averaging out EBITDA over the past five years. The trouble is, pharmacies – and margins – change every year. So any value estimate based on past performance alone can’t be really accurate. It is just a guess.

4. Mis-recording dispensary relief expenses

Maybe not a big deal, but we see it happen: a pharmacist-owner will log payment to a relief pharmacist as an accounting and professional expense. That’s not kosher.

Accounting and professional expenses are paid to accountants, lawyers and business consultants. Payments to relief pharmacists are a staffing expense. Recording them as “accounting and professional” lowers staffing costs, throwing your wage metrics into question.

5. Using paper ledgers

Hello? The 1970s called – they want their paper ledgers back!

No, seriously. Accounting software rendered paper ledgers obsolete about 40 years ago. And yet, in the 21st century, we sometimes encounter pharmacies that still use them.

One problem is obvious. It’s much easier to sort, analyze and share information with a software program than with a paper ledger. As business transaction advisors, we want to be able to efficiently work with data. If it’s recorded on paper, we just can’t do that.

Another, less obvious problem: Entering accounts on paper is a pain in the butt, and people are lazy. So they don’t record everything, or they will conflate a whole bunch of data into a single line item. Accounting software, however, is very granular and specific, so interested parties can comb through it, come up with meaningful insights, and – most importantly – trust the numbers. With paper ledgers, they can’t do that.

Remember: Lack of trust = Lack of a deal.

The best way to address accounting mistakes like these is to never start making them in the first place. If you are committing these errors, however, stop – and start fixing your accounting today. If you do, it will go a long way towards ensuring a less stressful, less time-consuming and more profitable sale process down the road.

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