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Held to account

Running Your Business

Held to account

With pharmacies feeling the pressures through funding cuts and Category M clawbacks, it’s vital that you keep your finances in order so you can remain competitive and protect your margins. 

While some business owners continue to look after their own books in house, many others are choosing to outsource their accountancy needs in order to free up resources and better manage their financial health in what is an increasingly demanding market. 

Director Matthew Dobbins heads up the UK pharmacy accountancy team at Dunkley’s and maintains that “whether you operate one business or several, accountants can help you remain profitable at a time when the NHS continues to be under financial pressure.”

Adding value

If you decide to go down this route it’s useful if the accountants you choose can provide a range of different services to make it worth your while. From professional accounting, administration and payroll support, and arranging pharmacy finance for both working capital and new acquisitions, there are likely to be plenty of options that can add value to what you’re capable of doing for yourself. For starters, Mr Dobbins picks out: 

VAT and bookkeeping Given the nature of your business, it’s more than likely to be registered for VAT as your annual turnover will certainly exceed £85,000 a year, and due to the fact that dispensing income makes up the majority of your turnover and you can reclaim the VAT on invoices for medicines supplied on prescription, you will be in a net VAT reclaim position. There are also specific rules which apply to pharmacy businesses compared to other retail outlets, so expert guidance is required.

Payroll and auto-enrolment Payroll is often an onerous and time-consuming task for business owners to handle. Pharmacists will need to either manage or delegate payroll duties, which include workplace pension legislation for any eligible staff you employ. For employees to be eligible for auto-enrolment, they have to be aged 22 or over and earn more than £10,000 a year. 

Selling your pharmacy If you are selling a pharmacy you will usually be liable for capital gains tax (CGT), although there are exemptions in place to reduce the amount you pay. For instance, entrepreneurs’ relief may reduce the rate of CGT when you sell your business from 28 per cent for higher-rate and 18 per cent for basic-rate taxpayers to a flat 10 per cent in certain circumstances. Entrepreneurs’ relief allows gains of up to £10m on business sales to be taxed at 10 per cent, while those who own more than one business can claim this relief up to a lifetime limit of £10m. For those who trade through a company, selling shares in the company that owns the business would usually be more tax-efficient that relying on goodwill or shareholders retaining ownership. 

Wider benefits

While this kind of day-to-day advice on tax and financial matters is now a service that is automatically provided by experienced accountants, it usually comes along with wider benefits such as advice on areas of the business that need attention, which can be an invaluable addition. 

Indeed, John Ierston, pharmacy partner at accountants and business advisers UHY Hacker Young, says: “I would go further and say that no pharmacy business can realistically manage without an external accountant. Some larger [pharmacy business] operators have internal accountants, but even that will not usually provide access to skills in the full breadth of services that a specialist external accountant will have.” 

Pharmacist Steve Jeffers, Director of STJ Healthcare Consultancy, says the long-range view that professional accountants can offer is also key, but relies on the pharmacy business owner to play their part. “If you’re using the services of an accountant you need to engage with them throughout the year rather than simply dumping your books on them once a year,” he says, “so you are ready to take advantage of tax concessions on capital equipment and so on because they have all the information they need to be on the ball.”

I would go further and say no pharmacy business can realistically manage without an external accountant

Monitoring cash flow is another critical service that accountants can do. “This is ever more critical,” says Mr Jeffers, “but it’s often something that independents struggle with. An accountant can help you work out where you are at this moment, but also where you’ll be in three and six months, which means that if you see an issue then you should be able to address it in advance rather than panicking when it happens.

“For example, you already know what the interim payments in the new contract are going to be until the end of March and you’ve got a rough idea what they are going to be next year, but what happens after that? There are various scenarios that you need to plan for now, and an accountant can help get to the bottom of that.

“Plus, crucially, if you ever want to sell your business or refinance, you’re going to need proper audited management accounts, which will come from working with your accountant, which all together make it obvious why it makes sense to know where you are at financially.”

Choosing a firm

Knowing you need an accountant is one thing but finding the right one is something else entirely. As with any decision you make for your business, researching the options is the best place to start. Look for independent reviews of accountants, draw up a shortlist and then ask to see testimonials from their clients.

“A recommended firm, local to you, that has existing pharmacy clients is as good as anything,” says Mr Jeffers. “If they are a smaller operation and local you are more likely to interact with them face-to-face, and they’ll be cheaper. If you’re running a six to 10 group pharmacy business then you may need to use one of the larger firms, but I’d still say that unless they are within half an hour’s travel from where you are, you are unlikely to be able to engage with them properly. And certainly don’t use your mate who’s an accountant just because you want to support their business – whoever you choose they really have to know pharmacy and have pharmacy clients already.”

View from the outside

Given the extra pressure on finances, accountancy firms attending last year's Pharmacy Show were, unsurprisingly, fielding requests from concerned business owners.

“The retail pharmacy sector at present is suffering from restricted gross margins, and increasing wages costs – both of which are materially squeezing the bottom line profit,” says Mr Ierston, “so we saw some worried pharmacists, who were effectively in need of specialised support because of reducing margins and high borrowings – and we are talking to some of them at the moment.

“For those pharmacists who have borrowed heavily to acquire their pharmacy, the loan repayments may not always be serviceable from available profits. A specialist accountant should be able to advise and assist in a refinancing process to reduce costs and perhaps extend the term of the finance, and we are certainly advising a few clients on what actions they can take to manage the situation and occasionally how to deal with breaches of banking covenants.

“Others are, nevertheless, still looking to acquire more pharmacies where they already have some cash reserves available, and we are helping them to source new opportunities.”

Pharmacy on point

When it comes to what ‘good’ looks like in terms of pharmacies managing their businesses better, Mr Ierston says: “In financial terms, ’good’ means a reasonable gross profit margin of at least 30 per cent, although we also have clients delivering 35 per cent and more. This generally is achieved by giving greater attention to the buying process but it also means controlling wage costs: around 15 per cent of turnover is good, although 12 to 13 per cent is not unknown, but those pharmacies paying wages and locum costs of 18 to 20 per cent may struggle to get a profit or meet debt repayments.”

Mr Jeffers agrees that there is a basic need to know “whether you make a profit or not”. He continues: “There are so many independent pharmacies that are run on a wing and a prayer and look sort of alright because the bank account looks ok, but the bottom line is that if your business is not making a profit then it’s not working. Don’t forget that there are plenty of progressive pharmacies out there which are already looking at how to take advantage of the new contract and get more than their fair share of services, and to succeed you’ll need to do the same.”

As with any operation, your focus should be on the strategic development of your business, and it’s clear that engaging the services of an accountancy firm can help free up your time. But if you’re not prepared to plan ahead and tackle the changes that are coming then it might be time to sell your business and get out of the sector, and their expert input can also help you with this too.

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Running Your Business