In the first of a new series of articles on financial matters, Avicenna’s finance director Steve Downs discusses pharmacy income statements

Understanding income statements

Every year your accountant sends you a set of accounts for your pharmacy and asks you to sign them off. Do you understand what you are looking at? If not, how do you know whether you should approve them?

Start at the top. Revenue. That’s easy, it is the total of your NHS receipts and counter sales. No problem there then. But what is gross profit? And further down there is operating profit. How many profits can you have? And what should they be?

Gross profit is the difference between your revenue and the cost of the goods sold. The cost of goods sold includes your purchases plus any change in the value of your stock. Most pharmacies have a gross profit of between 28 and 33 per cent, although the exact figure will depend on elements such as the proportion of OTC sales, the frequency of any high value specials and, most importantly, the terms that you have with your suppliers. If your gross profit is less than 30 per cent you should investigate and your buying group representative can help you improve it.

The other item that will reduce your gross profit is unclaimed revenue. Have you claimed all of your service revenue from the NHS or local commissioners? Do the prescriptions paid to you each month agree with the number that you submitted? Have all of your EPS prescriptions been claimed? Just because they go through EPS on your PMR doesn’t mean that they have all been reimbursed.

Operating profit is the second profit shown on your profit and loss account and is what’s left after deducting all the costs of running your pharmacy, including staff costs, rent and rates. A typical operating profit will be around 10 per cent of revenue before finance costs. It will be higher if you work in the pharmacy and don’t pay yourself a salary, so allow for that in deciding whether your figure is about right. Also, if you own the premises and don’t pay rent then the operating profit will be higher.

The biggest overhead item is staff costs. This is usually about 15 per cent of revenue, including pharmacists. If yours is higher then you should check it.

If you have given all the information to your accountant then the accounts are probably correct. The taxman uses these accounts as a starting point in checking your tax so it is important that they are accurate. However, although they may be correct, should they be better? Hopefully this article will help you decide that.