Anyone who is in business knows that cashflow is the life blood. One of the most critical aspects of a business that keeps it moving and functioning properly. It enables you to put stock on your shelf, pay the rent, pay your staff and, puts food on your table at home. Understanding it, managing it, and using it carefully requires an almost daily constant focus. So, to help community pharmacy owners we will be presenting a series of blogs all dedicated to cashflow and these three themes, understanding it, managing it, and using it.
This blog will focus on generating and managing your cashflow, Priya will write a blog on understanding the difference between profitability and cashflow, and Vic will do one on how to extract the cashflow from the business.
For first time owners and those thinking of owning a pharmacy one day, it is important you understand the cash flow cycles in a pharmacy and factors that impact it. It is one of the critical skills (amongst many others) that you must have as a business owner. That main critical elements of cashflow management in a pharmacy setting revolve around stock management, efficient processes, constant management of your core expense base and affordable finance repayment plans. I have outlined below some of the main points around these themes. The blog I have written here is another one of many we have done in the past.
I have listed below some of the basic concepts you need to understand and implement in your pharmacy to start improving cashflow.
1. Keep your fixed expenses low.
In any business there are a group of core expenses that do not fluctuate with sales volumes. Things like rent, insurance, telephone, subscriptions and memberships etc. These will always be there and will generally not fluctuate too much as the business sales change. Most of these types of expenses are necessities however, you do need to manage these well. Certainly, spend time in ensuring you are getting the best deals and particularly if you look at them from a “Return on Investment” perspective, to ensure you are getting good bang for your buck. Keeping these types of expenses to a minimum is very important, particularly in pharmacy. Having a low-cost base is a common feature in most high performing pharmacies. Reviewing these expenses once or twice a year as part of your budgeting process is a good idea. For those wishing to review their rent situations please contact the Pharmacy Guild WA branch and speak to them about their Rental database.
2. Finance and Loan Repayments.
Have a review of your loan facilities and see if there are any opportunities for refinancing. There are times these loan repayments can be a real burden on the businesses cashflow. I am always a fan of reducing debt, and it should always be a feature of your cashflow management. But it can’t be at the expense of the businesses cashflow and viability.
3. Variable Expenses.
These are the types of expenses that do tend to fluctuate as your sales volumes rise and fall. Things like wages, merchant fees, packaging and consumables etc. Wages being the key one. Efficiency in your processes, and the cost of delivering products and services to your customers is what needs to be analysed in depth. Being overstaffed and you are wasting money, being understaffed and you are missing opportunities and underservicing your patients. Look at your opening hours and the Gross Profit made per hour versus the staffing costs. Look at the actual costs involved in delivering professional services and 6CPA incentives. Are you making enough profit from these activities? Look into any efficiency gains with automated dispensing systems. If you are looking after nursing homes, are there any efficiency gains with automated packing machines? I have seen the actual data from a few pharmacies that have investigated this and seen the efficiency gains and cost savings. Always have a focus on efficiency of process.
4. Inventory Management.
Volume x margin. If you want profitability and cashflow, then you need to ensure enough volume of stock is being sold, at a big enough margin, to produce enough $cash, to pay for points 1, 2 and 3. In its basic format that is it. Having a discount approach is all well and good, but you need to move significant volumes to generate enough cash to meet all your other commitments. This by far is the key, but beware of the impact of the other points mentioned above. If too much cashflow is being sucked out of the business to meet other ongoing commitments, you will find you don’t have enough funds available to replenish stock levels. Then when your stock levels are too low, you risk giving your customers not enough opportunity to buy the things they want, leading them to go somewhere else. What you stock is also important. You need lines that turn over quickly at a margin enough to give you the cashflow to meet other commitments. If you are outlaying funds to put stock on the shelf, then you want that turned into cash as quickly as possible. This is an ongoing daily effort. Monitor all your departments and lines and ask these questions;
- Are they turning over quickly enough?
- Do they have a profit margin big enough to generate the profits you need?
- How much shelf space do you devote to that item for the profit it generates? Can you reduce the shelf space it takes up, to introduce new lines and make more money?
5. Some quick KPI’s that you can monitor that may help here.
- Stock turnover – Cost of Goods Sold divided by Stock on Hand
- Gross Margin Return on Inventory – Gross Profit dividend by Stock on Hand
- Gross Profit per square metre
- Gross Profit per Full Time Equivalent Employee
- Wages to Gross Profit ratio
In summary here are some hints for successful cashflow management.
1. Having profitability and cashflow budgets done each year is a great step to ask questions on what you are spending money on and why.
2. Regularly check your detailed Profit and Loss Statements against your budgets, for fluctuations and changes.
3. Have regular annual updates with your bank and finance broker to ensure your facilities are being managed properly.
4. From little things, big things grow. Any one change in isolation may not make a big difference, but combined lots of little changes do have a cumulative effect.
5. Look into automated options that may improve efficiencies in your processes.
6. A lot of your time and effort needs to go into managing your stock properly.
7. Pharmacy owners can only draw out what the business produces. When things are tight, expect to cut back or tip in from your own pockets.
Written by our Director John Thornett