Loyal Peak blog reads would have seen me write before those good decisions comes from good data! One of the most crucial roles of a pharmacy owner is ensuring the financial reporting function is operating effectively.
Now, before you have the thought, isn’t that what we pay our accountants and bookkeepers for? You must read below:
I am writing this blog because some valuations I have been doing lately have highlighted some flaws in the accounting process that sit in the laps of pharmacy owners. It is rare I am unable to complete a valuation (and I have come up against some complicated beasts.) In fact, up until the last couple of months, it has only happened once or twice in +20 years of doing valuations. But it has happened twice in successive months! I have been unable to complete these valuations because there are theses enormous discrepancies in the financial statements compared to the point-of-sale data. Furthermore, I am not taking about a few $’000’s this are several $’00,000’s. Interestingly the owners couldn’t explain the difference and didn’t even know there was one.
There are two questions that are vital when reading and interpreting financial statements prepared by your accountants and bookkeepers.
Does it make sense?
Why?
If your accountant and/or bookkeeper isn’t a pharmacy specialist, they may not be aware of what feels right and what doesn’t feel right. I use the term “feels right” as often you are given information from a pharmacy owner, you process that information, look at the results and see the results that are just not right. They might not know where to go to address, solve the problems and how to find answers. When you combine that with owners, who don’t pay enough attention to the accuracy of the financial reporting and POS data, you get a perfect storm of inaccurate reporting, a mess!
The best owners I know will often ask questions about their monthly accounts, that is for those we do bookkeeping for and their financial statements for yearend compliance purposes. In fact, we are questioning them during the process before the reporting is finalised, as we know what makes sense and what doesn’t. But a good owner questions data regularly and know when something is wrong. They ask the crucial questions, “does it make sense?” and “why?”
If problems crop up, as is life, such problems must be addressed before the financial reports are issued to third parties. Issues need to be addressed early, and systems/processes rectified and adjusted to ensure inaccuracies are eliminated. Errors caught early in a financial reporting process can likely be resolved. But, when issues are not picked up, then the financial reports are sent out, the implications can be enormous. Think about who relies on the data in these financial reports:
Australia Tax Office for your tax compliance obligations
Banks for lending approvals
Banks for ongoing reviews, assessments, and compliance
Approvals for vehicle or equipment finance.
Setting up supplier for accounts
Business Valuations for finance, for sale of the pharmacy etc
Potential buyers for the sale of your pharmacy
Buyers undertaking a due diligence
These are parties who will be making important decisions! It should not get to a point that errors of this magnitude are uncovered at this later stage.
So, pharmacy owners, yes, you are paying your accountants and bookkeepers to produce accurate financial statements, it is still your responsibility to firstly make sure they are getting accurate and complete information for them to do their job. Secondly, it is your responsibility to assess the reports and ask, “does it make sense”. If it doesn’t make sense, you must ask “why” until you understand the issues.
Lastly, and this is very important, there is the concept of “garbage in, garbage out”. If you are not paying enough attention to your own internal financial systems and procedures, then the quality of data in your Point-of-Sale systems, the information supplied to your accountant is going to be wrong and without questioning, your financial statements will then be wrong!
Stock on Hand is a classic case. If you do not have appropriate stock taking procedures in store, rolling stock takes performed, adjusting the stock on hand numbers in your system, the stock reports will be wrong, and so will your financial statements. I still see financial statements produced by accountants with opening and closing stock numbers at even rounded $’000’s. It is never a nice, rounded number. It makes me wonder what the ATO think.
The integrity of your data is vital, and that starts in the pharmacy. Your systems and procedures are everything, it must be a priority. Once you have that right, you know the data flowing your accountant/bookkeeper is right. Ensure you have a thorough review process to check the accuracy of the monthly financial reporting.
This should be as follows:
Monthly Balance Sheet
Monthly Profit and Loss Statement
Year to Date Profit and Loss Statement with prior year comparatives
If you have multiple entities for the one pharmacy, then consolidated reporting is essential.
If you have a budgetary process in place, Budget v Actuals is also important.
You must review the monthly reports and check the data in these reports to your own POS data. Make sure you ask questions if anything that doesn’t make sense or doesn’t reconcile. Keep asking until you are satisfied with the answer. Note the answer you may not like, but accuracy is vital for decision making.
If you wish to improve your financial systems and the accuracy of your financial reporting, contact us at Peak Strategies. We are community pharmacy experts. In fact, 100% of our client base are community pharmacists. We have a sound bookkeeping and reporting division that does an excellent job! Furthermore, we have a tax advisory and compliance division who are fantastic.
Simply reach out either myself or Priya (Director) via our website to book a free initial suitability meeting via the button below.
