Pharmacies have unique bookkeeping requirements due to being both healthcare providers and retailers. They need to track NHS income and retail sales separately to keep financial records accurate. After transactions are entered and posted to the ledger, a working document called an unadjusted trial balance is produced to check for errors in the posting process.
Inventory Management
Inventory management is a big part of pharmacy bookkeeping. Stock levels, expiry dates and pricing for thousands of items need to be monitored, and detailed records of controlled substances must be kept.
Key Areas to Monitor:
- NHS script payments and reconciliation
- Retail sales and margins
- Staff and locum costs
- Stock control and waste
- Supplier payments
- Professional fees
Cashflow
Cashflow is key in pharmacies as they often have delays between dispensing and receiving NHS payments which affects their working capital.
Good bookkeeping helps you track key performance indicators (KPIs) such as:
- Dispensing volumes
- Average script value
- Retail sales per customer
- Gross profit margins
- Operating expenses
Digital bookkeeping systems have become an essential tool for modern pharmacies. They are used to reconcile NHS payments and have real time financial visibility.
Regulation adds another layer to bookkeeping. You need to keep records for tax purposes and evidence of compliance with healthcare regulations.
Bookkeeping Basics
Double Entry Bookkeeping System
The double entry bookkeeping system is the foundation of modern accounting. In this system every financial transaction is recorded twice, once as a debit and once as a credit. This dual recording ensures the accounting equation (Assets = Liabilities + Equity) is balanced and gives a complete and accurate view of the pharmacy’s financial position. By using the double entry system pharmacies can keep records precise and make financial reviews and audits easier. This is essential for full accounting and to account for and balance every transaction.
Ledger Accounts
Ledger Account Structure
A well structured ledger account is crucial for recording all financial transactions related to a specific account such as cash, accounts payable or inventory. Each ledger account will have:
- Account Name and Number: Clearly identifies the account.
- Account Type: Categorises the account as an asset, liability, equity, revenue or expense.
- Opening Balance: The initial amount in the account at the start of the accounting period.
- Debit and Credit Columns: Records the dual entries of each transaction.
- Date Column: When each transaction occurred.
- Description Column: What each transaction is for.
- Balance Column: The running total after each transaction.
This structure of ledger accounts enables pharmacies to track and review their financial transactions. It helps in producing financial statements and provides a clear and organised way to analyse financial data to better manage and make financial decisions.
Financial Reporting and Compliance for Pharmacists
Pharmacy financial reporting requires strict compliance to regulations whilst keeping records transparent for tax authorities and healthcare regulators. An accountant processes the financial information recorded by bookkeepers and produces financial reports and makes necessary adjustments to ensure financial statements are accurate. Strong financial controls protect the business and patient care quality.
Producing Accurate Financial Statements
Financial statements are the backbone of pharmacy accounting. We recommend separate ledgers for prescription sales, over-the-counter products and NHS reimbursements.
Bookkeeping and finance qualifications provide the necessary skills and knowledge to produce accurate financial statements.
Balance sheets must clearly show inventory values, separate controlled substances from general stock. This separation meets regulatory requirements and simplifies annual audits.
Monthly profit and loss statements need to track:
- Prescription dispensing fees
- NHS payments
- Private prescription revenue
- Retail sales margins
- Operating expenses
Regular financial reviews help identify discrepancies early. We recommend quarterly reviews of:
- Cashflow patterns
- Inventory turnover rates* Gross profit percentages
- Operating expense ratios
All financial entries must be supported by clear audit trails. This means maintaining prescription records, supplier invoices and NHS payment notifications.
Inventory Management for Better Cashflow
Inventory control directly affects a pharmacy’s cashflow through stock investment and stock turnover. Smart stock management prevents cash being tied up in excess stock whilst maintaining sufficient stock to meet patient demand.
Managing Inventory and Stock Levels
A perpetual inventory system can track stock levels in real-time. This allows precise ordering and prevents stockouts and overstocking.
Weekly stock counts for fast-moving items and monthly for slower lines. Set par levels for each product based on historical sales data and seasonal patterns.
Use ABC analysis to prioritise inventory management:
- A items: High-value meds needing strict monitoring
- B items: Moderate-value products with regular turnover
- C items: Low-value items with minimal financial impact
Just-in-time ordering for expensive meds to reduce stock holding. Negotiate payment terms with suppliers to extend the cash conversion cycle.
Monitoring Expiry Dates to Reduce Waste
Track expiry dates using pharmacy management software. Flag items approaching expiry 6-12 months in advance to plan promotional activities or returns.
Dedicated space for short-dated stock and review weekly. Contact suppliers about their return policy for near-expiry meds.
We suggest a ‘first expiry, first out’ (FEFO) system to minimise waste. Train staff to check expiry dates when receiving deliveries and rotating stock.
Document waste costs monthly to identify areas to improve and adjust ordering patterns. Consider partnering with other local pharmacies to transfer short-dated stock where allowed.
Practical Accounting Solutions and Software: Double Entry Bookkeeping System
Modern pharmacies need robust accounting systems to manage complex financials, inventory and tax compliance. Digital solutions streamline these processes while maintaining accuracy and efficiency.
Choosing the Right Accounting Software for Pharmacies
QuickBooks Online and Xero are the leading options for pharmacy accounting. These platforms have features specifically for tracking prescription sales, NHS payments and retail transactions.
Ob-serve Pharmacist has gained popularity in UK pharmacies with over 1,000 businesses using its features. It’s great for managing UK specific VAT schemes and connects directly to HMRC’s Making Tax Digital.Key features to look for:
- Inventory management
- NHS payment tracking
- Prescription sales monitoring
- VAT scheme compliance
- Real-time financial reporting
Benefits of Cloud-Based Systems
Cloud-based systems provide secure access to financial data from anywhere, so you can monitor your business on the go.
They automatically backup data and update tax regulations, reducing the risk of compliance issues. Real-time collaboration with your accountant becomes seamless, so you can get financial advice and support quickly.
Benefits include:
- Reduced IT maintenance costs
- Automatic software updates
- Multi-device access
- Enhanced data security
- Better collaboration tools
Payroll Processing with Accounting
Integrated payroll systems streamline staff payments and update accounting records automatically. This prevents errors and saves time.
Choose a software that does PAYE and National Insurance calculations for you. Many cloud-based systems have built-in checks for workplace pensions and statutory payments.
Must-have payroll features:
- Automated tax calculations
- Employee payment processing
- Real-time HMRC reporting
- Digital payslip generation
- Leave management
Balancing the Books: Receivables, Payables and Profitability
Pharmacy financial management requires keeping track of receivables and payables to maintain healthy cashflow. Monitoring insurance payments and patient payments whilst managing supplier costs is the foundation of profitability.
Controlling Expenses and Payables with Ledger Accounts
We recommend a digital system to track all supplier invoices and payment terms. This prevents late fees and maintains good vendor relationships.
Weekly reconciliation of inventory costs to supplier statements is essential. We’ve found that weekly reviews help spot discrepancies early.
Key expense categories to monitor:
- Pharmaceutical wholesale
- Staff wages and benefits
- Utilities and rent
- Insurance premiums
- Equipment maintenance
Set up automated payment schedules for regular suppliers to reduce admin and ensure timely payments.
Running a Profitable Pharmacy
Insurance payments are vital to pharmacy profitability.
Must-track profit metrics:
- Gross profit percentage
- Average transaction value
- Inventory turnover
- Operating expense ratio
Patient payments require robust processes. Set up clear payment terms and automated reminders for outstanding balances.
Regular management accounts review helps spot trends in income and expenses. Monthly profit and loss analysis highlights opportunities for margin improvement and cost reduction.
Get Help
At Diamond Accounts, we understand the unique bookkeeping challenges pharmacies face—from managing stock and supplier payments to staying on top of VAT and NHS funding. Our expert team ensures your finances are accurate, compliant, and stress-free, so you can focus on delivering excellent patient care. Whether you need ongoing support or a fresh approach to your accounts, we’re here to help.
Get in touch today to see how we can make bookkeeping easier for your pharmacy.