At Peak Strategies we get to see a lot of pharmacy financial data, whether it’s from our own compliance or bookkeeping clients, or from the valuations we do. One of the most important aspects of managing your pharmacy’s finances is cashflow. Cashflow is king. It is the lifeblood of your pharmacy and therefore needs to be given priority. What often comes up though is the slow creep of cashflow tightening.
With pharmacies, shifts in cash flow rarely happen overnight; they are processes that unfold gradually. Many may traverse several months appearing seemingly "normal," only to suddenly grapple with challenges in settling supplier payments on the 24th and 30th of each month. Owners, overcome in myriad concerns such as patient issues, staffing complications and stock supply issues sometimes can lose focus. Often, it is an amalgamation of seemingly discreet factors that contributes to this slow creep of cash flow complications.
Consider, for instance:
1. Increasing stock levels over many months.
2. Slow and gradual declines in both retail and dispensary sales. 60 Day Dispensing is an example of this.
3. Escalating wages despite dwindling sales. Recent wage increases over recent years, particularly pharmacist wages has bene a big contributor here.
4. Incremental rent hikes.
5. Accumulation of high script owing amounts from pharmacies catering to nursing homes.
6. False cashflow positions induced by the timing of High Cost Drugs.
7. Owners maintaining constant drawings while profitability and cash flow decline.
Throughout a pharmacy's lifespan, numerous issues can erode cash reserves. The critical challenge lies in some owners not responding swiftly enough. While having a robust financial system is crucial, swift analysis and response to data are equally vital – a facet often overlooked. Owners often get caught in the busyness of their business life, and often don’t stop long enough to pay attention to these slow changes. It is quite common actually.
For those finding themselves in this predicament, who suddenly become aware of their cashflow position, the solution lies in a straightforward equation, pay attention to you cash inflows and outflow. Nothing revolutionary there, but it is that simple. The problem generally only comes about when owners have become distracted and not focussing on the cash blood flow. Here are some actionable tips:
1. Efficient financial reporting systems are paramount; accuracy is key to understanding your position.
2. Engage a pharmacy expert accountant to provide feedback on your pharmacy's performance compared to others.
3. Act swiftly on advice, implement new systems and measure results. Be patient though as often the financial impacts may take time to manifest.
4. Prioritise gross profit dollars over percentages; scrutinise and optimise departmental performance, stock holding, stock turns, dead stock.
5. Review staffing structures, implement necessary changes, and establish budgets for wages and hours. But do not ever sacrifice patient service levels.
6. Make sure you know exactly how much stock you have on your shelves. This is a common problem.
6. Maintain sustainable stock levels; collaborate with buyers to ensure appropriate volumes at reasonable prices.
7. Work with accountants to prepare profitability budgets and cash flow forecasts for the next 12 months.
8. Utilise budgets and forecasts to reassess expenses and eliminate non-essential costs, as well as proactive planning 12 months in advance to address cashflow shortages.
9. Expenses can only be cut so much. Many expenses are fixed in nature. Therefore, recognise that growth requires an increase in script and customer numbers; develop a solid marketing strategy to bring in new patients into your store, and a patient service strategy to ensure their instore experience is enhanced and basket sizes maximised.
10. Adjust owner compensation based on business performance, acknowledging the dynamic nature of business ownership.
Inaction is the worst course of action. Acting swiftly, patiently, and with a level-headed approach is crucial, even though the turnaround may span months. Overreliance on overdrafts is akin to a band-aid solution; it doesn't address the root problem.
Though challenging, turning a business into a cash flow-positive entity imparts invaluable lessons. You need not navigate this journey alone; seek the guidance of a competent accountant that understand pharmacy and how to best manage your business.