Accounting mistakes, Part 4: Accounting gaffes round-up – the final five

Selling a pharmacy successfully – in other words, at a top price with minimal stress for the pharmacist-owner—depends upon getting the basics right. And nothing is more basic than proper accounting. Without it, the numbers will work against you, no matter how good they might look on the surface. In short, when it comes to accounting and selling your pharmacy, it pays to get it right.

In previous articles, we looked at a few common types of accounting errors, from improper inventory record-keeping to inappropriate accounting for capital and staff expenses. But there are many other gaffes we have seen occur during our years supporting pharmacist-owners who want to sell their businesses. They might not fall into any neat categories, but they can still turn what should be the most financially and emotionally satisfying event of your career into a nightmare.

So, to round out our discussion, here are the rest of the Terrible, Horrible, No Good, Very Bad accounting mistakes to avoid.

1. “Negative” margin in dispensary records

Depending on the medication, a payor might count a drug as a single dose that a supplier counts as multiple doses – an inhaler, for instance, could sometimes be counted both ways. A pharmacist or technician might record several doses in the dispensary system and bill for multiple doses through the drug plan – which, of course, the payor won’t pay. That creates an obvious disparity, but the dispensary software usually won’t pick it up and will end up showing a negative margin. In other words, the dispensary is “eating” the disparity between cost and billing.

Now, imagine you’re a potential buyer and you look at a pharmacy’s dispensary and accounting records. If the negative margin in the dispensary records is still there, it could create a much lower gross margin than the accounting records show. That’s a red alert, because you won’t know which set of numbers you can trust.

The solution: regularly compare dispensary and accounting records and clear any false negative margin off the books, so that your dispensary records conform with actual costs and revenue. We have seen many pharmacist-owners who don’t bother to do this, and that can be a big mistake.

• 2. No dates on accounts payable

If you or your accountant are only considering what your business owes right now as accounts payable, then you’re leaving out a big element: the future. For every business, there are payments yet to be made, and these need to be recorded and dated in the AP column. Without that information, your pharmacy’s cost of goods (COG) will be inaccurately low and its earnings (EBITDA) will be artificially high.

Not accruing accounts payable can make a buyer question two of the most important financial metrics in a sale negotiation. As a seller, you don’t want to create questions.

3. Accounts receivable? Accounts payable? What’s that?

Incredibly, we see many balance sheets that have no accounts receivable or accounts payable logged at all. So, basically, they give no indication of how much money is coming in and how much is going out. What’s the pharmacy’s margin? It is just a guess.

Now, we’re pharmacy business valuators, so when faced with such a situation, we try a workaround by averaging the pharmacy’s EBITDA over the past five years. Yet the reality is that pharmacies – and margins – change every year. So any estimate of the pharmacy’s value based on this method cannot really be accurate. It is still just a guess.

4. Mis-recorded dispensary relief expenses

There’s a line item in record-keeping for accounting and professional expenses. Sometimes, a pharmacist-owner will put expenses for a relief pharmacist in this line – but they shouldn’t. Accounting and professional expenses are paid to accountants, lawyers and business consultants. If you’re paying a relief pharmacist, that’s a staff expense. If you record that expense as a different line item, you are artificially lowering staffing costs, throwing your margin calculations into question.

5. Paper ledgers

Seriously? Thanks to accounting software, paper ledgers have been obsolete for about 40 years. But today, even though this is the 21^st century, we still encounter pharmacies that use them.  

Software is just better, for a bunch of reasons. The biggest is that it’s easier to sort, analyze and share information with a software program than with a paper ledger. You and your advisors, not to mention potential buyers, need to be able to work with data efficiently. Paper ledgers don’t let anybody do that.

Another problem is that using a paper ledger to enter accounts is time-consuming and boring. People are, in general, lazy creatures, so they won’t record everything, and they tend to mash up a bunch of disparate data under one heading or line item. Once it’s down there on paper in ink, it’s really hard to unpack. Accounting software, on the other hand, lets the recorder be very specific, and it’s easy to do. That means anyone looking at the numbers later can derive meaningful insights and – importantly – trust the numbers. Paper ledgers don’t let them do that.

Remember: Any successful sale transaction begins and ends with trust. If your financial records are inaccurate or misleading, then trust is undermined, and you are increasing the likelihood of walking away from a deal disappointed.

So, if you find yourself making these accounting errors, stop – and start fixing them today.