We have the advantage of seeing the financial data of many pharmacies on a regular basis. From there we get to see what is going on in the world of pharmacy land. What has been noticeable over the course of the first 6 months of this year was the tightening of cash flow in most pharmacies.
With most pharmacy businesses, changes in cash flow is generally not an overnight thing. These things take time. Many can go through several months of appearing to be “normal” and then suddenly paying the suppliers on 24th and 30th of each month is a little bit more problematic. Owners can easily take their eye off the ball when they are surrounded by so many issues, patient issues, staffing issues, etc etc. and often is lot of little things that contributes to cash flow issues.
1. Stock levels increasing.
2. Gradual slides in retail and dispensary sales.
3. Wages increasing despite falling sales.
4. Gradual rent increases.
5. High Script Owing amounts from pharmacies looking after nursing homes.
6. The false cashflows positions often bought about by timing of High Cost Drugs.
7. Owners drawings staying constant whilst profitability and cashflow falls.
There are a lot of issues that come up over the life of a pharmacy that can bring about declines in the cash reserves. The critical issue I see with some owners is they are not responding quick enough. Having a good, efficient and well-functioning financial system is one thing, but looking at the data and responding quickly is another. Many are not doing this.
So, if you are in this position, and your cashflows are getting worse and worse as each month goes by, what can you do about it. If you think about it the maths here is rather simple. Your cashflow is a pure function of cash in and cash out. For your cashflow to improve you needs to increase the cash coming in and decrease the cash going out. Here are my top tips;
1. What you can measure you can manage? It is essential your financial reporting systems are efficient and accurate, so you know exactly where you are.
2. Have a pharmacy expert accountant go over your numbers so you can get the right feedback on how your pharmacy is performing compared to other. Only those accountants who are experts in pharmacy can help you here.
3. Listen to the advice and act quickly and measure the results. Note here sometimes the financial impacts of your decisions can take some time to filter through to your bank account, but constantly measure.
4. Gross Profit dollars pay the bills, percentages don’t. Focus on maximising gross profits. Have a thorough analysis of all your departments. Reduce of remove the lines that are slow turnovers and replace with high turnover lines.
5. Have a fresh look at your staffing structures and rosters and make the necessary changes. Some of the best pharmacy owners I know have a wages and hours budget for their managers to work within.
6. Make sure your stock levels are kept at sustainable levels. Some owners even have stock purchasing budgets for their team, so they have some guidelines to work within. Work with your buyers to ensure the right volumes are purchased at the right prices. Note here the key word is sustainable. Your cashflow will go backwards if the levels are too high. It will also go backwards if they are too low. Stock needs to be on the shelf for customers to buy it.
7. Work with your accountant and have your profitability budgets and cashflow forecasts prepared for the next 12 months. The idea here is to be realistic. We can work with you here to ensure these are set out properly.
8. Use these budgets and forecasts to take a fresh look at your expenses and reduce or eliminate those that are not essential. Note Accountants are essential…just saying.
9. You can only cut the guts out of your cost structures so much. You can only go so far. For your pharmacy to grow and for its cashflow to grow, you will need your script numbers and customer numbers to grow. And that is not going to happen on its own, somehow magically. You will a solid marketing strategy and there is a lot that can be done here without spending much money, or any at all. Again, we can work with you here.
10. As an owner what you get paid is not fixed. If the business makes more, then you can take more. But the reverse also applies. If the business makes less, you will need to take less. Sorry but that is the reality of business ownership. And every successful business owner has been through this.
The worst thing you can do is nothing.
You need to act and act quickly. You also need to be patient and level headed. The turnaround can take months. Also note getting an overdraft, extending an overdraft etc is just a band-aid solution. It is not fixing the key problem
As hard as it is, there are some good lessons you will learn if you can turn around your business into being cash flow positive. And these lessons are hard, but essential. Also you don’t have to do this alone. Get the help and support you need from the right accountant who understands pharmacy.
Written by our Director John Thornett.