Understanding cashflow is very important for all pharmacy owners. Cashflow is the availability of cash in your pharmacy at a point in time. Cashflow will allow pharmacies to financially operate their day-to-day business.
Over the past few years, I have worked with many pharmacies with various cashflow situations; some have a very healthy cashflow and others that have been challenging. Those with healthy cashflows have no problem in paying their suppliers on time and still have enough cash left in the bank for their rainy day funds or any out of ordinary expenses that pop up. Now with the ones with cashflow problems, they tend to struggle to cover their operating expenses on time each month. This can be problematic and disruptive for the pharmacies because if they continue to pay the suppliers late each month, there are continuous calls chasing up payments, the suppliers will start putting orders on hold, alter payment terms or even terminate their services. At times owners are also having to inject their own personal funds or borrow funds from related entities to temporarily help with cashflow management.
Having a good understanding of your pharmacy’s cashflow is vital especially with the recent 60 days dispensing changes which started earlier this month. As we are yet to know the real impact of this new policy, it is critical for pharmacy owners to keep a close eye on their pharmacy’s cashflow to ensure that the business can keep operating and navigate around the impacts of the introduced policy. Below are my top hot tips that you can use to manage your pharmacy’s cashflow:
1. Inventory Control
Having your shelves stocked is important for a pharmacy to ensure products can be sold in order to maintain operations however there are more things you can do with your stock reviews. You can review the following:
· Review which products are generating sales in your pharmacy - What you want to keep in store are those with a high turnover and sold with a profit margin so you can generate profit and cashflow for your pharmacy. What you do not want to do is keeping a high level of products that do not sell as it might become obsolete. This can be looked at in conjunction with Item 2 below (Review Pricing) when generating profit margins.
· What do your customers and patients want from your pharmacy - This data will also reveal to you what your community is seeking from your pharmacy and might help determine what key services and products are popular in your store. Keep in mind the variety of products on offer so you don’t risk losing potential customers for not having products that they need available.
· Review your stock on hand balances - It is always a good idea to review your stock on hand balances every month as not only will it give you an accurate stock level, but also give you a chance to review what products are selling and which are not.
· Stock Order Budgets – Have a monthly ordering budget in place to avoid over ordering stock or ordering stock that is not necessary. The budget needs to be flexible and reviewed regularly to reflect the actual trading performance of the pharmacies and their trends. It is also important that this budget is communicated clearly with the store buyer to ensure that both the owners and staff are on the same page.
2. Review Pricing
Focusing on the gross profit percentage is good so you can compare your performance against the industry’s benchmark or against your point of sales reports. However, you need to make sure that you look at the dollar value to make sure that you are generating enough profit to cover all your expenses.
There are 2 factors that impact your gross profit dollar and it comes down to these two factors that you must look at together:
· Sales - Review your pricing strategy. It’s good to sell products in low prices or offer discounts to attract patients and customers however to increase your profit, you need to ensure that you are selling your products at the right price. You might also want to look into increasing prices for some products that are not price sensitive or even consider reviewing pricing on your services provided.
· Cost of sales - Reduce your cost of sales to increase gross profit dollar (this has been covered in Item 1 above under Inventory Control).
3. Reviewing Rosters
Payroll expenses are one of the biggest expenses to a pharmacy and wages and super are expenses that your pharmacy will always have no matter if your pharmacy is doing well or not. How much you pay towards wages is determined on how well you manage your staff rosters.
Rostering is a balance between getting the right amount of staff on and the right roles to assist with the daily needs of your customers and patients. You need to make sure that you are not rostering too many people on at any given time as it will cause inefficiencies and increase wage costs.
As a response to 60 days dispensing changes, some pharmacies have already started considering or implementing the following when it comes to their rostering:
· Reviewing their rosters and finding more efficient ways to roster staff on.
· Reviewing the business to see if there are other services or tasks they can offer and which employees they currently have which they can utilise or boost their current skill sets. An opportunity to provide additional services or create new ones can boost new income streams for the pharmacy and set yourselves apart from competitors and maintain your staff (i.e. putting more time into marketing, assisting with health services, promotional campaigns, etc. which will help building awareness of your pharmacy in the community).
· Reviewing employee tasks and efficiencies.
· Reviewing trading hours and reducing staff hours where required.
· Setting wages budgets to keep an eye on wage costs.
· Looking at wage subsidy programs (i.e. Traineeship Incentives).
· Finding softwares that can assist with rostering as it can be time consuming building rosters each week.
4. Reviewing Owners Drawings
Some pharmacy owners receive regular payments from the business as their drawings. Most of the time these drawings are used to cover loan and interest repayments for their business buy in. Owners need to keep in mind that you can draw out funds from your business however when you draw out more than what your business produces, your business may begin to experience cashflow issues as they might have insufficient funds/timing issues as they are already struggling to pay the bills on time to keep the business running.
With the 60 days dispensing changes, we strongly recommend for owners to review the business performance and cashflow on a regular basis and adjust the drawings taken out from the business accordingly.
5. Review Your Business Pay As You Go Instalments (PAYGI)
Pharmacies with a company business structure will normally have to pay PAYGI every quarter. If your pharmacy’s instalment income from the last lodged tax return is $2 million or more, you will need to prepay your tax to avoid a large tax bill upon lodging your tax return. The amount that you report and pay each month is not fixed and can be varied before you lodge your activity statement.
With the uncertainty of the 60 days dispensing impact to your pharmacy, we strongly recommend for you to contact your accountant so they can review your instalment income each quarter before you lodge your activity statement. What we want to achieve with regular reviews is for the pharmacies to pay just enough instalments each quarter to cover their tax bill for the year so they can preserve the cashflow for the business. Please bear in mind that if you are varying your instalments and it differs greatly to the actual tax paid for the year, you may receive penalties from the ATO as your reporting was not justified according to business performance.
6. Prepare Annual Budgets
We are now on the third month of the financial year, but we believe that it is never too late for you to sit down with your accountant and do a budget or forecast for your pharmacy for the financial year. This will allow you to review your income to see if there are any strategies that you can implement to increase your revenue and also reviewing your expenses to see if there are any unnecessary expenses that you can cut down this year. It will allow you to use the budget as a tool to keep track and monitor financial performance.
We understand that there are a lot of uncertainties that surround the pharmacy industry due to the 60 days dispensing policy. While the impact is yet to be determined, we believe that you have the ability to take control of your cashflow management by planning and implementing strategies so you can lessen the impact of these changes.