Cash flow for pharmacies is getting tighter each day; discover 3 ways to improve your pharmacy's cash flow.
What Is Cash Flow
Cash flow is often confused with profits. While every pharmacy owner wants profit to convert into cash, it doesn't happen that way for pharmacies. A typical retail pharmacy gets most of its business from third-party payors and not from cash at the point of sale. This means you have a large amount of accounts receivables (AR). Your AR balance is the amount of money that other companies owe you. Putting this all together shows that you will record profit from a sale before collecting the money in the bank. This is why a healthy cash flow is absolutely critical to the survival of independent pharmacies.
Descriptions of Cash Flow
Think of your bank account as a bathtub with the drain open. If you close the drain and turn on the faucet, the tub will fill up with water (money in this analogy). When the drain is opened, the water pours out. Think of the faucet as the inbound cash flow and the drain as the outbound cash flow. If your drain is much bigger than your faucet, water will never accumulate in your bathtub. When a pharmacy doesn't manage its cash flow properly, the money will never be positive in the bank accounts or your wallet.
Top Causes of Negative Cash Flow
Inventory too high
Payroll too high
Expenses too high
Solving the problem of your pharmacy's cash flow troubles requires digging into your financials and your business practices. Rx Advisors has helped pharmacies nationwide fix their cash flow to experience an influx of cash instead of low balance alerts. While holistically fixing your cash flow is the complete answer, looking at both your faucet and your drain, we see the largest and most common causes for poor cash flow to show up on the outbound side. Let's dive into the top 3 causes of poor pharmacy cash flow.
1. Inventory Too High
Your pharmacy's inventory is its largest asset. Many pharmacies carry inventory between $150,000 to $300,000. It can be easy to forget that all those bottles on your shelves represent little piles of cash everywhere. Since you pay for inventory long before you are paid for the dispensing, this creates a strong cash outflow. If you let your inventory get too high, this will deplete the amount of cash you have in your bank. By tightly controlling your inventory, you can keep the right amount of products available and more cash in the bank.
How Do You Know Your Inventory Is High?
The measurement tool for inventory is called inventory turns. This is a mathematical calculation that takes into account your cost of goods and your revenues. The terminology "turns" comes from the concept that this calculation gives you the average number of times a typical bottle is used and turned over with a new bottle in your pharmacy in a year. While some bottles are turned over multiple times a day and others only a few times a year, on average, you want this number to be more than 16. If you need help calculating your inventory turns and strategies to improve it, call Rx Advisors at 855-877-9807.
2. Payroll Too High
Managing and controlling your inventory is very black and white, while fixing your payroll costs almost always comes with emotional baggage as well. Reducing bottles on your shelves doesn't impact your beloved colleagues. Reducing someone's working hours will most certainly negatively impact a beloved employee. There are strategies to control your payroll without massive layoffs.
Three Steps for Managing Payroll to Improve Cash Flow
First, you need to know where you stand. The number used for tracking payroll is most often called the “payroll ratio”. This number is calculated by taking all your payroll expenses for a specific time period and dividing it by the same period's total revenues. Once you multiply by 100, you have a percentage. A typical retail pharmacy should be below 13%, and our top performing pharmacy clients are often below 11%.
Second, evaluate your current employees and their roles in your business. Ask yourself this critical question: "Would I rehire this person for this role?". Sometimes you do need to let someone go. Perhaps they aren't a fit anymore, or the business has changed, and you no longer need their services. Once you have a list of everyone you want to keep, determine their average pay and compare it to the ideal amount of pay to meet your targets. The difference here is your wage overage.
Lastly, create a plan of action. This plan will vary widely from pharmacy to pharmacy as everyone's wage overage will be different. Let's assume you need to cut $1,000 a week in payroll. You have 2 pharmacists and 8 technicians. The pharmacists make $50 an hour, and the techs make on average $15 an hour. Here are some options.
Have each pharmacist work half a day once a week (savings $400 a week)
Have each tech work 1 hour less a day (savings $600 a week)
This is just an example, and it is best to be open and talk to your staff about the changes. Perhaps someone wants to volunteer to take a whole day off each week. Also, let your employees know how to get out of the reduced payroll hole... more revenue! Get them excited about selling more OTCs or referring a friend to the pharmacy. With more revenue comes more payroll hours.
3. Expenses Too High
Oftentimes when Rx Advisors reviews a pharmacy's first set of financials, its expense ratio is far too high for the revenue it is generating. An expense ratio is a way to examine a pharmacy's expenses in relation to its revenue. To calculate this ratio, add up all expenses and divide them by the revenue generated for the same time period. When you multiply by 100, you will have a percentage of revenue that goes to expenses. In the past, a ratio in the low 20s was acceptable. However, with DIR fees and lower reimbursements, an ideal ratio is now less than 19%. The lower you can get your expense ratio, the better its positive impact on your pharmacy's cash flow.
Long-term Cash Flow Management
As a pharmacy owner, you need to manage your cash flow and do 1,001 other tasks too. If you happened to get an accounting degree along with your pharmacy degree, then this will be easy. If, instead, you joined a fraternity and focused on your kinetics class, then this may be over your head. Rx Advisors is proud to help pharmacy owners manage this massive undertaking. Our pharmacy specific Quarterly Performance Report (see example) puts the essential business metrics at your fingertips in an easy-to-read and understand format. We can help you to focus on the critical items that are causing your poor cash flow and will help you fix them. Visit our website at www.rx-advisors.com or call us at 855-877-9807.