Cash flow is the lifeblood of your pharmacy, essential for keeping operations running seamlessly. It's the available funds at any moment that allow you to meet daily expenses, pay your suppliers, and invest in the growth of your business. Grasping the nuances of cash flow management is critical for the sustained success of your pharmacy.
Through years of experience, we've seen pharmacies in various cash flow scenarios. Some are financially robust, consistently paying suppliers on time and setting aside funds for future needs. Others face challenges in covering monthly expenses, which can lead to late payments, strained relationships with suppliers, and even the need for emergency loans. But don't worry—it's possible to turn things around and steer your pharmacy toward financial stability!
Key Strategies for Maintaining Healthy Cash Flow in Your Pharmacy
1. Optimise Inventory Management
Effective inventory control is the cornerstone of maintaining a positive cash flow. We want to ensure that you have enough stock to meet the customer demand but not too much stock that they might become obsolete. Below are some items to review to help improving your inventory management:
Strategic Stocking: It is good to have diverse range of products in store to give customers option, but it is important to do a regular review and see what products are generating sales in your pharmacy. To increase the bottom line and improve your cashflow, it is better to focus on high-turnover, profitable items. We also want to avoid tying up cash flow in slow-moving products as there is a high risk that the products will become obsolete which will affect your pharmacy’s profitability.
Customer Insight: We don’t want to have too much or too little stock on hand but more importantly, you need to know what your customers are looking for from your pharmacy. You want to avoid missing sales and disappointing customer by not having available stock in store.
Regular Reviews: We strongly recommend for pharmacy to do rolling stocktake and review their stock on hand balance each month. Not only it will make sure that the stock on hand balance in your point of sales and accounts are accurate, but also you can see the trends of which products are selling and which are not.
Budget Control: It is always a good practice to have a monthly ordering budget to prevent overstocking. However, it is still important to review the budget during the month and make any necessary adjustment depending on the pharmacy’s actual performance. Pharmacy owners need to ensure that this practice is communicated with the staffs so everyone is on the same page and working towards the same goal.
2. Refine Your Pricing Strategy
Reviewing gross profit percentage is a good practice to do regularly so you can compare your pharmacy’s performance against the industry’s benchmark. It is also important to look at the gross profit dollar and make sure that your pharmacy generates enough profit to cover your expenses. The 2 factors that impact your gross profit dollar are your sales and cost of sales. To increase your sales, you might want to review your product prices to ensure that you are selling them at the right price or look at increasing prices for products that are not price sensitive. Other than increasing sales, you can increase your gross profit dollar by reducing your cost of sales. The strategies to reduce your cost of sales have been covered in point 1 above by having a good inventory management system.
3. Streamline Staff Scheduling
Payroll is one of the most significant expenses for any pharmacy. Your pharmacy will always have both wages and superannuation expense no matter how your performance is. But you can manage these costs efficiently with efficient rostering.
Staffing Balance: Ensure you have the right number of employees to meet daily demands without overstaffing, which can lead to inefficiencies and higher wage costs.
Maximising Efficiency: You might want to review the employees’ current tasks, efficiencies and skills to see if you can utilise their skills to explore new service offerings. This will help your pharmacy generate a new income stream which will increase the bottom line. You can also look into investing in a rostering software as it is time consuming to prepare rosters every week and it will free up your time to work on other aspects of the business.
Setting Budgets: You can set wages budgets to monitor the wage costs.
4. Monitor Owners’ Drawings
Some pharmacy owners draw regular payments from the business to cover their loan and interest repayment for their business buy in or for any personal expenses. However, you will need to review your drawings to ensure they align with the pharmacy’s profitability. If you draw out more than what the pharmacy produces, the pharmacy will experience cash flow disruptions and struggle to keep the business running.
5. Manage Your Pay As You Go Instalments (PAYGI)
PAYGIs are regular prepayments of the expected tax on your pharmacy income each quarter. Pharmacies with a company structure whose instalment income is $2 million or more from the last lodged tax return will need to prepay their tax to avoid a large tax bill upon lodging the company tax return. The amount that you report and pay each quarter is not fixed and can be varied before you lodge your activity statement. Collaborate with your accountant and/or bookkeeper to review and adjust PAYG instalments each quarter to ensure you're paying the correct amount. Money that can be kept with you is better than handing it over to the ATO for the year.
For owners who receive income distributions from the pharmacy or those who operate their pharmacies as sole traders, a tax cut on the individual tax rates has already commenced. As of 1 July 2024. The current adjusted rates include:
The 19% tax rate will be reduced to 16%.
The 32.5% per cent tax rate will be reduced to 30%.
The income threshold above which the 37% tax rate applies will be increased from $120,000 to $135,000.
The income threshold above which the 45% tax rate applies will be increased from $180,000 to $190,000.
Depending on your income bracket, the tax that you need to pay for the 2025 financial year might be lower which means that you can reduce your quarterly PAYGI to reflect this tax cut. Please note that you should calculate your estimated tax as accurately as possible. Penalties from the ATO may apply if you vary your PAYGI drastically and it does not reflect your current circumstances. Please check in with your accountant before making any adjustments to your instalment if needed.
6. Implement Comprehensive Annual Budgeting
As we have just started a new financial year, it is a good time still for you to have a discussion with your advisor to prepare a well-structured budget for the year. This exercise will help you to identify opportunities to increase revenue and reduce unnecessary expenses. You can use this budget as a tool to monitor and track your pharmacy’s financial performance throughout the year.
Based on our experience over the years in helping pharmacy owners prepare their annual budgets for their pharmacies, it has helped them understand their business better and allowed them to focus and motivate themselves throughout the year to make smarter decisions or changes sooner rather than later. They can understand trends happening within the pharmacies from patient needs and trends, the external factors impacting the industry and whether their pharmacy model and strategies are a good fit for their community. Owners can see the bigger picture and create strategies to reach their projected goals.
If you need any assistance with preparing a budget for your pharmacy, you can reach out to one of our friendly team members. Alternatively, if you haven’t checked it out yet, Victoria did a blog not too long ago about preparing budgets for your pharmacy. Click here to read.
7. Other Income Streams
Besides what you stock on your shelves, there are other income streams that pharmacies can consider. With the 8th Community Pharmacy Agreement (8CPA), pharmacies should see an uplift in the dispensing fees and the freezing of co-payment indexation.
Some other alternative income streams that may be available to your pharmacy can include:
Making your claims for pharmacy incentives (i.e. Meds checks, diabetes meds check, dose administration aids, home medication reviews, etc).
Immunisation program.
Rural pharmacy incentives.
Review any government business grants and programs that may be available.
Adding other service offerings (i.e. Lotto, newsagency, post office, etc).
The 8th Community Pharmacy Agreement (8CPA) commencing on 1 July 2024 allows for more opportunities to pharmacies to increase their remuneration and fundings from the government into their business. Soon, community pharmacies across Australia will be able to offer further additional services under full scope of practice. This will provide more opportunities to service your community and their health needs.
In order to consider if this will work for your pharmacy, it is a great time to review your current resources and consider the timeline of getting your pharmacy ready for full scope of practice:
Make sure that you and your staff are all trained to provide the services that you want to provide in your pharmacy.
Have the facilities and/or resources in your pharmacy to offer these services.
Marketing plan and strategies to advertise and educate the community of the new services that you will provide in the pharmacy.
These services may not generate income immediately compared to the previous strategies mentioned however it is a longer term strategy to invest into your business. By providing more services to the community, it can set your pharmacies apart from your competitors, increase the traffic in your pharmacies which will have a positive impact on your bottom line and cash flow.
Take Charge of Your Cash Flow
By adopting these strategies, you can take control of your pharmacy’s cash flow, navigate financial challenges with confidence, and maintain the overall health of your business. Proactive cash flow management ensures that your pharmacy not only survives but thrives, even in the face of uncertainty.