Top 5 Reasons a Pharmacy is Tight on Cash
Pharmacies Have Certain Characteristics That Make Managing Cash Unique and Challenging.
Have you Ever Looked at Your Monthly Reports or Year-End Taxes and Asked Yourself, “If We Made That Money This Year, Why Does it Feel Like Such a Struggle?”
Below Are the Top Five reasons a pharmacy is Potential Tight on Liquid cash
1. Pharmacy Inventory
Inventory is a very large part of a pharmacy’s financial picture. Millions of dollars are spent annually on the cost of goods sold. Hundreds of thousands of dollars are tied up in inventory on the shelf. With a fast-paced pharmacy, inventory moves in and out quickly. Purchase decisions are made by several employees throughout a shift. Computer support can improve the processes but sometimes worsens them. Drugs acquired for a single patient often get discontinued or the patient (or physician) stops using your pharmacy.
If you are cash poor, the very first place to look is inventory. Pharmacies are varied, of course, but what if inventory increases by 10%? If a pharmacy’s previous year-end inventory was $250,000, and current year-end inventory was $275,000, that is a $25,000 increase.
Inventory is an Asset. That means the value of inventory is not calculated into any profit calculations until it is sold. So, over the course of a year, the pharmacy with a 10% inventory growth has taken $25,000 out of the bank to pay the wholesaler, but the inventory is on the shelf. This means less cash, more inventory, and no trace on the Revenue and Expense report.
Reason #1 Pharmacy is Low On Cash: You Paid for Additional Inventory
2. Principal Paid on Loans
Another hidden drain on cash is principal paid on loans. One of the reasons that this is less obvious to long-time business owners has to do with compound interest. Most people know that when you take out a new loan, the majority of the payments made are for interest. Consider that as time moves on, the amount of the payment is generally the same, but the amount of interest is reduced. Therefore, the later years of a loan are largely principal. For calculations of Profit and Loss, businesses can deduct the interest on the loan as an expense. However, the principal paid on the loan is not reflected in the Revenue and Expense statement. The result: payments are being made on the loan, but there is less of an expense. In accounting terms, the company simply has less cash, and less long-term debt when the principal is paid.
Reason #2 Pharmacy is Low On Cash: You Paid off Principal on your Loans.
3. Accounts Receivable
Possibly even more impactful on a business cash flow is Accounts Receivable (A/R). Since most healthcare organizations post revenue at the time the service is complete, the Revenue and Expense Report may look like you made a healthy profit. But, if you offer terms to your customers (insurance companies are notorious), they may not have paid you yet.
Two steps should be taken to analyze this. Step one: Is there a recent growth in sales? Sometimes, a pleasant uptick in sales just means the money will be in next month, once the invoicing is complete and standard terms are considered. Step two: Watch your A/R aging report! Perhaps a big customer is getting behind, or several small customers are getting behind.
Reason #3 Pharmacy is Low On Cash: Your Customers are Paying too Slowly.
4. Accounts Payable
Accounts Payable (A/P), is a very sneaky area to investigate for Cash Flow impact. If you have had times that are tight, and you have let some bills get behind, catching up on payments could hinder your cash flow. Again, this could also be a result of growing your business.
For example, say at the beginning of a year, you owe your wholesaler $90,000. And, by the end of the year, you have paid down the balance to $50,000. Your diligence has had a $40,000 impact on your checkbook. In other words, there was no profit or loss associated with paying down a previous debt. It simply came out of your assets.
Reason #4 Pharmacy is Low On Cash: You Have Been Paying Back Old Debts (Accounts Payable A/P).
5. “Hidden” Expenses
A final area to investigate are your organization’s “hidden” expenses. Many businesses, pharmacies, hospitals, and healthcare systems have them. Let’s list a few from a pharmacy/healthcare list of possibilities:
Adjudication/Billing Fees: Do you have a system for watching what you pay for submitting the bills? Some insurers make them clear on their statements, others try to hide them by reducing them from the amount promised.
Banking Fees: Usually banking fees are easy to spot, however, when unsure check with the bank being used.
Reimbursement Differs from Amount Adjudicated: Unless each reimbursement is tracked per claim, this is an area to watch closely.
“Lost” Payment: In healthcare, the pace is fast, and there are many sources of revenue. Remain diligent and account for every check that is owed and received. If current procedures are allowing for vendors to forget to pay bills once in a while, that needs to be tightened up.
DIR or Similar Fees: Sometimes direct and indirect remuneration (DIR) fees are so hidden, it takes an expert to find and identify them. Watch for them to be removed from a check for payment of other claims.
Reason #5 Pharmacy is Low On Cash: There Are Hidden Cash Flow Leaks in Your System.
How to Track Your Pharmacy’s Cash Position:
Watch Inventory Investment
Recall That with Debt Service, all Principal Payments are Not on the Profit & Loss Statement
Watch Customer Payments with an Accounts Receivable Aging Report and Process
Paying Down Your Debt, Your Accounts Payable, is Important, but Note That Doing so Takes Cash From the Bank Without Affecting the Profit and loss Statement
Hidden Fees Consume Profits. Find Them, Record Them, and Adjust if Necessary.
Above are five common ways and remedies to cash flow shortages, even with good sales and profits on the books.
Is there an easy way to watch financial’s without keeping an eye on those five areas individually?
An Often Neglected Financial Report is Called a Statement of Cash Flows.
The statement of cash flows report will show, all in one summarized area, where money has gone. The report separates what improved the cash position from what caused the cash position decline.
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In Future Blogs, We Can Discuss Best Practices to Managing Liquid Cash Assets Effectively, and How to Understand Your Statement of Cash Flows.