A good turnover can create a false sense of security. It indicates the amount of income earned but does not indicate the amount of profit made, when the income is collected, or whether each prescription and service is generating sufficient profit to cover costs. Pressure is everywhere. In 2026, Community Pharmacy England indicated that 75% of community pharmacies surveyed were making losses, whereas only 14% were profitable. So, it is vital to keep good management accounts and perform pharmacy-specific analysis.

Turnover Is Not Profit

Turnover is the total income from sales in your pharmacy before deducting any expenses, including the cost of medicines, salaries, rent, utilities, interest charges, and taxes. The gross profit is calculated by taking turnover and subtracting direct expenses. Net profit arises after deduction of all overhead expenses. Your pharmacy can sell more units at lower prices. Gross margin needs to be controlled separately for:

  • NHS dispensing
  • Retail sales
  • Private prescriptions
  • Clinical services

Medicine Costs Are Eroding Margin

The reimbursement prices often fail to correspond to the cost of drugs purchased by pharmacies. In situations of shortage of goods or change in price, the purchase price of medicine can exceed the price of its reimbursement. According to the 2026 Community Pharmacy England Survey, 99% of participants noted that the cost of drug reimbursement was lower than their expenses.

Reconcile your monthly NHS payments with:

  • Dispensed medicines
  • Purchase bills
  • Expected charges
  • Bank statement

Stock Is Absorbing Cash

Inventory held in stock represents money that could be used to pay salaries, suppliers or HMRC. Excess inventory, dead retail ranges, duplicate purchase orders, failed to claim returns, and out-of-date drugs are some examples of what can affect the cash flow. The value of the inventory also affects the bottom line since the inventory is usually written off at the lower of cost and net realisable value. 

Check the following periodically:

  • Stock Days
  • Losses on Expiry
  • Supplier Credits
  • Returns
  • Category Stock Turnover
  • Slow-Moving Retail Items

Payroll Costs Have Increased

The total cost of recruiting employees involves much more than just paying salaries to staff members. It may also involve costs such as locums, overtime, pension, holiday replacement, and employer National Insurance. In the tax year 2026/2027, the standard employer National Insurance charge rate will be 15% on earnings above the secondary threshold.

Calculate employment costs in relation to:

  • Gross profit
  • Number of prescriptions
  • Opening hours
  • Service fees
  • Number of staff and their schedules

The objective should not be cost reduction alone, but creating an efficient schedule and skills mix without affecting patient care, services, or finances.

Services May Underperform

Pharmacy First, immunisations, contraception, and private clinics provide opportunities for income diversity. Yet each service can consume clinical hours, consultation rooms, consumables, administration, and claims processing. Determine the net income from each consultation, not only the consultation fee. Measure the following elements:

  • Staff hours and pharmacist hours
  • Costs of consumables
  • Use of consultation room
  • Claims rejected
  • Claim window missed
  • Appointment availability
  • Unfilled appointments

The 2025-26 settlement fixed the consultation fee for the Pharmacy First clinical pathway service at £17 and the contraception consultations at £25.

Cash Timing Causes Pressure

Profit and cash are different. There could be money in the books that is not yet in the bank, yet invoices from wholesalers, PAYE, VAT, and other tax obligations remain unpaid.

Advance payments from the NHS are estimated and later reconciled. On-time submission via Manage Your Service is critical, as any delay could affect your access to the advance payment.

A 13-week rolling cash flow forecast could help identify shortages before the due dates for payments arrive.

VAT Errors Distort Results

Pharmacy revenue could consist of zero-rated, exempt, and standard-rated sales.

Examples could be:

  • Medicines that qualify as zero-rated, dispensed on prescription for personal consumption.
  • Most retail sales could be standard-rated.
  • Some health services could be exempt.
  • Incorrect VAT coding would result in distorted income, VAT liability, and VAT input.

It is important to use separate VAT and accounting codes for:

  • NHS dispensing
  • Clinical work
  • Prescriptions made privately
  • Private work
  • Retail sales

Different types of work require different treatment; there is no one VAT code for all pharmacy income.

Tax Is Not Planned

Monies held in the bank account may consist of monies for VAT, PAYE, Corporation Tax, payments to suppliers, and payroll. For Corporation Tax, the small profit rate is 19% for profits under £50,000, whilst the standard rate is 25% for profits over £250,000, with marginal relief possible in between those two figures. Thresholds can be lowered by having associated companies.

Tax planning should take place before the end of the accounting period and will relate to issues such as:

  • Capital Expenditure
  • Remuneration Planning
  • Pension Contributions
  • Loss Relief
  • Structure of Business
  • Timing of Taxable Income and Tax Allowances

Whatever actions are taken should be based on both commercial and taxation considerations.

Reports Arrive Too Late

Information about your business’s past performance from accounting records can arrive too late for correcting a deteriorating margin or cash flow situation.

Monthly management accounts need to include the following:

  • Turnover
  • Gross Profit
  • Gross Margin
  • Staff Costs
  • Profit after Operating Expenses
  • Cash Position
  • Stock Holding
  • Debtor Balance
  • Tax Provision

Comparison with budget, previous month, and the same month last year.

The following might indicate potential problems:

  • Increased turnover and low gross profit
  • Stock build-up
  • Over-reliance on the overdraft
  • Increase in debtor balances
  • Insufficient provision for VAT, PAYE, or Corporation Tax
  • Increase in locum or overtime costs
  • Inadequate income from service revenue to meet delivery costs

Actions for Pharmacy Owners

  • Reconciliation of NHS forms, dispensing and bank payments each month.
  • Calculate gross margin and contribution by revenue line.
  • Evaluate stock, expiry, returns and supplier credits.
  • Maintain a 13-week rolling cash flow forecast.
  • Calculate total staffing and locum costs.
  • Evaluate the VAT coding of each revenue source.
  • Provision for expected VAT, PAYE and Corporation Tax.
  • Monthly evaluation with a pharmacy specialist accountant.

How Reflex Accounting Can Help

Our pharmacy accountants can assist in spotting margin leakage, cash flow forecasting, evaluating stock and supplier accounts, reviewing service performance and ensuring timely reporting and compliance.

Reflex Accounting offers bookkeeping, management accounting, payroll services, VAT advice, NHS income reconciliation and tax planning geared towards pharmacies.

Our accountants for pharmacies do not just focus on recording turnover. Our pharmacy accounting is about ensuring you understand your true profitability and safeguarding your cash position.