Big changes can be challenging for any business but some things never change.
Government regulation, insurance laws, and an aging population all have a huge impact on pharmacies. For smaller, independent pharmacies, one challenge remains the most common. Cash flow.
If major changes in the industry were holidays, the cash flow crunch is like the movie Groundhog’s Day, repeating over and over. You can survive the cash flow crunch, but first you need to know what causes it and what you can do to improve your cash flow.
One of the biggest causes of pharmacy cash flow issues is inventory. Cash flow is all about cash in, cash out, and having cash on hand when you need to cover costs. As a cash flow problem, inventory cuts both ways.
When you have more inventory on hand than you really need, you’ve taken some of your money and tied it up in that inventory. An extra $5,000 in unnecessary inventory means you have $5,000 less in cash, which could be a problem when bills come in. Inventory can’t help pay those bills until it sells and turns back into cash. You can’t make that happen at will, unless you discount something and sacrifice your profit margins.
Having too little inventory can lead to cash flow problems as well. Cash inflow comes from sales and out-of-stock items can have a huge impact on your sales. Not only that, they can also damage your reputation with customers who may choose to move to a pharmacy that keeps their products in stock more often.
When cash coming in is slower than cash going out, you have the makings of a cash crunch. Of course, this is always going to be the case with a pharmacy, to some extent.
The delay in receiving third-party payments means you often have to pay to restock before you’ve been paid. As long as this is consistent, you can pay this month’s bill with last month’s collected receivable but timing is out of your hands. A cash cushion can protect you from poorly timed payments.
Expenses that are too high are another key factor in cash flow problems for any business. Going back to the basics, money in and money out are the foundation of cash flow. Minimize expenses that are taking money out without bringing money in.
Expenses should be an investment that brings you a solid ROI. This isn’t always as simple as it sounds but tracking is crucial.
Are your payroll expenses bringing a return? You could be wasting money if you over staff without productive work for those employees to do. Hours of operation can affect this as well, if you’re paying staff during times when you bring in very few sales.
Are you paying for marketing that’s not bringing in a decent return? Many small businesses don’t have a good way to track the results of their marketing and end up spending money without getting much benefit. You need to know that every dollar going out is bringing in at least a dollar of after-tax profit in a timely manner.
All of these issues are common to independent pharmacies, but there is something you can do to solve these problems and become uncommonly successful.
The solution – Your accounting system
All of the factors above can be very frustrating when you don’t have a solid grasp of the numbers. Whether it’s inventory management, controlling payroll, or making marketing decisions, going by feel and making guesses is a sure way to damage your cash flow.
You need a system to track these numbers and a way to analyze them. Once you have the data under control, you can make profitable decisions that boost cash flow without any guess work.
Of course, building an accounting system and analyzing numbers isn’t likely to be your focus. Even if it’s a skill your comfortable with, it’s not the best use of your time. You should be free to focus on bringing in new customers and increasing sales. The best person to help you gain that freedom is an accountant who knows small business and pharmacies in particular.
What gets measured gets improved
You can’t begin to improve your cash flow, or the factors that affect it, until you know what the problem is. Your accountant can ensure your bookkeeping and accounting system is set up correctly to capture all that data and make it clear for you to read. They can help you focus on the metrics that mean the most and analyze what changes in these metrics mean for your business.
If you have an internal bookkeeper, your accountant can advise on what they should be tracking so you can make better decisions. Even better, if your accountant offers bookkeeping services (like here at BSM Accounting Services) they can keep you updated on changes in real time. Waiting until the end of the month can cost you. Keeping a finger on the pulse of any changes allows you to make corrections before cash flow is impacted too heavily.
When you work with an industry specialist, you reap major benefits. Expectations for expenses, payroll, receivables, shrink, etc. vary from one industry to another. An accountant who specializes in independent pharmacies knows what to expect and can quickly recognise when something is out of the ordinary. They also stay on top of tax and regulation changes that affect your business and the tools and technology that can help it run better.
Strong cash flow puts your business in a great position. During slow times, it ensures that you can pay your bills without taking on debt. When business picks up, great cash flow lets you take advantage of early payment discounts and promotional purchases to reduce your costs.
There are several factors that go into cash flow, but the three above are a great place to start. How does your pharmacy stack up?
If you have any questions on your accounting system and how to optimize your pharmacy to survive the cash flow crunch, reach out to BSM Accounting Services.