Six steps to better accounting for pharmacist-owners
June 20, 2024
Back at the start of the year, we suggested 12 business resolutions for pharmacist-owners to follow through on in 2024. Some of them are simple (like talking to a strategic wealth advisor) and some are even fun (like, well, have more fun at your store!). But there is one resolution that can be a real challenge for independent pharmacist-owners, and unfortunately it’s also the one that can have the biggest impact—positive or negative—when you decide to put up your pharmacy for sale: Get your accounting practices in order.
There are very many good business reasons to follow sound accounting practices. Reliable numbers tell you how your business is performing. They help you find areas of weakness, strength, opportunity and risk. They come in handy when dealing with regulators and tax authorities. They smooth the path to a good relationship with your bank. And they are absolutely critical when you are trying to sell your pharmacy for the maximum price.
Any capable potential buyer is going to take a long, hard look at your pharmacy’s accounts. They will want to see that the numbers are up-to-date, follow accepted accounting practices and accurately reflect the performance of your business. They certainly don’t want to see red flags that might suggest malfeasance on the part of the owner or raise the risk of an audit or other legal/regulatory action in future.
A buyer might look at your store’s location, its staff, its competitive advantage (or lack thereof), its customer base—all those can be important. But none is as important as solid financial numbers on which they can base their estimate of your pharmacy’s value.
So, obviously, solid accounts are vital to a successful business and a successful sale. But how do you know if your accounting practices need a clean-up?
Lorraine Myers, MBA, CA, CPA, is Senior Valuation Consultant here at Evcor, and we asked her to discuss some of the accounting issues pharmacist-owners should focus on to ensure their books are in good shape. Here are six of them:
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What are your accounting procedures?
Good accounting is kind of like brushing your teeth: you need to make it a habit. The most effective way to implement good accounting practices is to make them part of your monthly accounting. This will produce a reasonable representation of operating results for any month so you can make better decisions. And when a reporting period ends, you and/or your accountant won’t have to spend time making a myriad of reconciliations and adjustments. Remember: garbage in, garbage out.
Resolving to make good accounting a habit might mean assigning the recording of financial transactions to a properly trained and experienced individual or advisor. That might seem more expensive in the short term, but in the long run it is the most cost-effective way to establish sound financial management.
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Pay attention to bank reconciliations.
Bank reconciliations should be accurately prepared by a knowledgeable person. Most accounting software packages come with reconciliation modules, but they often permit the carry forward of outstanding items from period to period, unless actual adjustments are processed. Leaving the reconciling items “hanging in limbo” for months means that on the business’s balance sheet, asset, liabilities and any related revenues and expenses will not be correctly stated.
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Are you properly recording accounts receivable and accounts payable?
We are perennially surprised by how many pharmacist-owners fail to keep accurate records of accounts receivable—or don’t record them at all. That’s a mistake.
AR should be recorded at each reporting period or, better yet, in an ongoing subledger of amounts billed and collected. When AR is not recorded or if it’s understated, revenue for that reporting period will be understated. Charge accounts—while usually minor in comparison to receivables from third-party insurers—should be monitored, and there should be rigorous follow-up on overdue accounts. Uncollectible accounts represent a reduction of profitability, and it is impossible to determine the impact unless the amounts are known.
The other side of the coin is accounts payable. Proper recording of accounts payable is essential to not only correctly reflect liabilities on the balance sheet, but also to accurately record purchases for inventory reconciliation and expenses incurred in the period.
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Account for commercial terms the right way.
If you want a clear picture of profitability, you must be able to compare revenue and costs in any given period. But in the world of pharmacy, revenue from commercial terms is very often incorrectly recorded. Commercial terms should be reported in the period they are earned, not in the period they are received, and outstanding amounts at any reporting period should be included in accounts receivable. That’s because commercial terms are not revenue, but rather a reduction of purchase cost; they should be recorded as a component of cost of sales. The best way to handle them is to record them in a separate account.
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Confront inventory.
We could write a book about inventory mismanagement, but the fact is that if you are not conducting physical inventory counts and using appropriate cut-off procedures—which ensure that inventory is recorded in the right period—then your pharmacy’s cost of sales and profitability could be understated or overstated. So may the value of inventory on the balance sheet. Usually, keeping track of dispensary inventory does not require hiring a third-party to count it—staff counts or perpetually updated inventory counts would usually be more accurate anyway. Front-of-store is a different story: if you have a lot of inventory on your shelves, a third-party count might be a good idea.
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Capital asset or operating expense?
Repair and maintenance expenses should be carefully reviewed. If they cost more than $200 and have a useful life of more than a year, they should be recorded as capital assets and amortized/depreciated over their useful life. If you record them as operating expenses instead, then you may be understating the operating assets of the business, reducing profitability.
If all that sounds complicated—well, it certainly can be. When you are trying to ensure good accounting practices, getting sound advice from a competent, experienced accounting professional can be well worth the time and expense involved. But having some familiarity with the common issues and challenges can at least help you ask the right questions and focus on the right areas.
And remember: the longer bad habits persist, the harder they usually are to fix. So if you’ve resolved to clean up your accounting practices, good for you—and get started today.
[…] It typically includes business-related items like improving operational efficiency, making sure the accounting is in order, enhancing facility decorum and right-staffing the store, as well as more personal matters like […]