Do you have the right financial systems in place? Atif Butt considers what you need to do when setting up an accounting system that is right for your pharmacy business…
Every business needs an accounting system so that it can record its activities, report its financial results to the tax authorities and pay any taxes as they become due.
Under HMRC’s Making Tax Digital rules from April 2021, all UK VAT-registered businesses are required to keep digital records using a computerised bookkeeping system. So the starting point for any accounting system is that it can help you meet these compliance requirements.
Going digital means you can streamline your accounting processes as your data is held online, so you can connect to your bank account and submit documents electronically to massively cut down on the amount of paperwork you need to file and store. It also makes it much easier to work collaboratively with your staff and accountants, as everyone can access the same data wherever they are, as long as there’s an internet connection.
But what other benefits can you get from having the right system in place, and how can you customise it to really help your community pharmacy business?
Of course, in order to run a business it’s essential to know how much tax you need to pay and when. But a good accounting system can do a lot more than that.
The need to report throughout the year means you will always have up to date management information, so you can review performance on an ongoing basis together with your accountant instead of only ever looking at it once a year (usually many months after the financial year has ended)!
Management reports can help you look at key performance indicators for your business over time, so you can target and monitor areas for improvement. The main reports you would look at are the profit and loss report and balance sheet, but there are a number of others that may be relevant.
You will need to decide what the important areas to look at for your business are, and how regularly to monitor them. This could include looking at your profitability, specific categories of sales and expenses, the performance of different departments or branches within your business, or the cash flow of the company.
It is important to identify the key areas to look at that are relevant to improving your business, so that you can manage the time and cost requirements of your accounting processes.
Once you’ve decided on the areas you want to look at and compare, you can customise the chart of accounts in your accounting system, which determines how income and expense items are categorised. For example if you wanted to track your OTC revenue to help with purchasing decisions, you can break out your sales into product lines so that you can compare different categories of over the counter sales to monitor their relative performance over time.
You can also categorise your expenses in as much detail as you need. If you have different branches or departments within your business you can set these up in your system so that you can compare their performance in your management reports, which can also be customised.
Once you have set up your system, you can put in place a structured plan for improvement by mapping out a list of prioritised targets you want the business to achieve in the key areas identified, and a timeline over which you want to achieve them.
For example, the targets can include things like reducing stock holding and wastage, improving the businesses gross profit margin, reducing staff costs, and reducing overheads. You should be able to work with your accountant to decide which areas are especially relevant for your business.
Then you need to analyse and monitor the businesses performance regularly and ensure that it’s on track to meet the targets for improvement, review the results and re-evaluate the plan where necessary.
This process can increase the profitability and value of your pharmacy and help you in making financial decisions and being better prepared for the future.
Atif Butt is a senior accountant from Hutchings Accountants.