Practical tips and solutions to improve cash flow
- Deciding on the proper response requires understanding the root cause of the problem.
- 13 common problems can hurt pharmacy cash flow. There are practical, achievable solutions for each.
“In pharmacy school, we primarily received a clinical education, as opposed to the real type of business education necessary to maximize your potential as a business owner.”
This is a statement that Dan Benamoz, CEO of Pharmacy Development Services (PDS), often uses to start presentations to independent pharmacists. And, it provided the context for his discussion at McKesson’s ideaShare on “Mastering the Art of Cash Flow.”
Cash flow isn’t the problem. It’s a symptom.
A financially struggling pharmacy owner often sees cash flow as the problem. But it is not. Cash flow is an effect or a symptom of something else happening in the business. Improving cash flow requires first understanding the root cause of the problem.
Among the themes of these cash flow problems are:
- Expenses. Cash flow can be hurt by not being rigorous enough in controlling expenses. This can include poor buying practices, not monitoring shrinkage, and having too much inventory, which ties up cash.
The solutions are largely process-oriented. Review purchasing practices and arrangements with vendors. Have a sound inventory management system. Have systems that ensure personal accountability and minimize shrinkage. Process solutions don’t have to be complicated. Simple process solutions can decrease expenses and improve cash flow.
- Financing. Cash flow is often hurt by high accounts receivable, high current liabilities, high borrowing costs and high interest expenses. Often pharmacy owners are using letters of credit and credit cards (which are short-term financing sources) to finance longer-term assets, like equipment or remodeling. Try to get long-term debt to, consolidate debt and refinance at lower interest rates. Paying careful attention to financing can dramatically improve cash flow.
- Sales. Managing expenses and reducing financing costs are critical parts of the equation, but a great way to improve cash flow is by growing the business through increased sales. The best way to grow is not by focusing on selling products or services, but by solving problems. (See Smart Retailing Rx article for tips on revenue growth.)
13 common causes of cash flow problems
Among the many possible root causes of cash flow problems, Benamoz identified and discussed 13, which are shown below, along with high-level solutions to each.
|Root cause of cash flow problem||Solution|
|1||Too much inventory||Implement a simple inventory management system.|
|2||High accounts receivable||Limit the amount of credit extended to customers and the amount of third-party receivables.|
|3||High current liabilities||Refinance short-term debt as longer-term debt.|
|4||High borrowing costs||Limit borrowing and consolidate debts.|
|5||Low productivity||Adjust payroll to changing economic circumstances and use performance bonuses instead of pay raises.|
|6||Shrinkage||Have systems that reduce people’s temptations and ensure personal accountability.|
|7||Bookkeeping errors||Develop a system that prevents any double payments.|
|8||Poor buying||Look for all opportunities to reduce the cost of goods purchased. Don’t take anything for granted.|
|9||Poor pricing||Pharmacy owners often don’t price high enough. No one expects a lower price than chains; customers just don’t want to pay a lot more than they need to.|
|10||High interest costs||Avoid using high-interest credit cards for purchases.|
|11||Poor expense control||Examine all expenses to see if they are absolutely necessary. (“Want” is different from “need,” and sometimes “good enough” is more than adequate.)|
|12||High hidden costs||At times space is used for storage or office space instead of revenue generation. Look for hidden opportunities to reduce costs and increase revenues.|
|13||Low sales||Don’t try to sell products or services — that’s not what people buy. People buy solutions to problems. To sell more, solve problems.|
By understanding the root causes of cash flow problems it is possible to develop targeted solutions. The solutions can be simple: carefully manage inventory and expenses to free up cash; consolidate debt and refinance at lower rates and longer terms; and identify a few key problems to solve to drive sales.