Understanding your pharmacy’s cashflow – from the customer to your bottom line (Pharmacy Guild – May 2014)

Atul Mehta from Moore Stephens Markhams Chartered Accountants talks us through understanding where your cash comes from and where it goes.

Cash can only come from:

  • Business profit generating it.
  • Owners investing it.
  • Business borrowing it.

Sales – purchases = Gross profit
Increase sales: focus on increasing over the counter sales and maximising revenue from every customer who enters the pharmacy. Cash is also generated from prescription sales, but these sales are difficult to increase.
Decrease purchases: buy better, capitalise on prompt payment discounts, and ensure efficient stock management.

Gross profit – wages – overheads = Net profit
Wages: Good rosters are important. Also don’t be afraid to invest in training to increase staff productivity.
Overheads: What do you have to pay for whether your business is open or shut?

Net profit – tax – loans – asset purchases = Left over for owners?
Not yet. There is still working capital to consider. This can eat away at your profit before you see the cash.

Debtors + stock – creditors = Working Capital
Debtors: what people owe you.
Creditors: what you owe people.
Stock: what you are holding to sell.

Example one
Debtors $60,000
+ Stock $50,000
– Creditors $100,000
Working capital $10,000
Result: low working capital needed
Example two
Debtors $60,000
+ Stock $100,000
– Creditors $100,000
Working capital $60,000
Result: high working capital needed

 

 

 

 

 

 

The key is movement in working capital.

Periods in this example can refer to days, weeks, months or years – working capital is always moving.

Period One Period Two Period Three Period Four
Debtors $60,000 $60,000 $60,000 $60,000
+ Stock $50,000 $50,000 $100,000 $50,000
– Creditors $100,000 $100,000 $100,000 $100,000
Working capital $10,000 $10,000 $60,000 $20,000
No cash impact $50,000 worse $40,000 better – but are you really?

Changes in working capital do not reflect your profit performance. For example, in period three cash is worse off but that may be because of higher sales (more profit), and stock might be higher because you got a great discount for bulk purchasing (better gross margin). In period four cash is better, but in reality the debtors may be lower due to no sales in the period.

Remember, it is important to understand both your cash and profit. To do this requires up to date information (eg, Xero, GST), a budget to report against, and accountability (eg, current asset ratio).

Published in Contact Magazine May 2014. Written by Atul Mehta.

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