Using Budgets to Increase Cash Flow for Your Pharmacy

For independent pharmacy owners, understanding the fundamentals of your business’s finances and how to manage your budget is essential to making better decisions that improve cash flow.

At the 2020 Pharmacy Development Services (PDS) Super Conference, which was held from February 27-29 in Orlando, Florida, Dan Benamoz, RPh, founder and executive chairman of PDS, and financial expert Andy Tanner gave a lesson on how to boost your financial IQ.

Pharmacies often focus on their cash flow, but Tanner noted that the ability to understand how your overall business works is important in managing this aspect. “When you have a cash flow problem, it’s really not a cash flow problem. Cash flow is a symptom of some other problem in our business,” he said.

According to Tanner, there’s never been a more important time to understand your budget than now, especially in the pharmacy industry. “Now that’s more than what we buy and sell, what are our expenses are,” he said. “Our ability to make decisions based on data, not just a whim, not just what we think, is going to be very, very key in the coming years.”

To better understand how to overcome cash flow problems, it’s imperative to take a look at your finances from a fundamental analysis perspective. Of particular importance is diving into the components that make up your financial statement. Benamoz highlighted the 3 reports that make up a statement:

1. Balance sheet: Benamoz described the balance sheet as a “snapshot of a single moment in time” that contains your assets (“things and stuff”), liabilities (everything you owe), and equity (what you own).

2. Sales: Sales minus costs of goods sold gives you a gross profit. That, minus expenses, gives you your net income.

3. Cash flow: This includes first cash that comes in through operations (eg operational expenses, income, day-to-day expenses), investments, and financial cash flow.

According to Benamoz, if the balance sheet is a snapshot, then the sales and cash flow reports are the “movies” of your business finances. “Profit and cash are not the same thing, they are 2 totally different things that have to have their own movies,” he said. Tanner added that it’s important to distinguish the difference between profit, which is “a theory of what might be”, and cash, which is what is “real” and "what's in the bank". The ability to read and understand how these financial statements interact with each other will change your whole business, he said.

“Understanding your cash that’s coming from operations, understanding your cash that comes in and out of from your investments, and understanding cash you use with debt and finance are the 3 place that you’re going to have cash coming in and out,” Tanner said.

In terms of increasing your cash flow, Benamoz emphasized an important consideration: being busy and being profitable are not the same thing. For example, if you wanted to increase your sales by 40%, you might say that you want to increase 200 prescription per day in order to get to that goal. However, Benamoz suggested looking at it a different way in order to focus on profitability. Instead, cutting expenses by 10% may also help you reach that goal and increase profitability.

According to Tanner, when it comes to managing expenses, the burden of leadership and entrepreneurship is decisiveness and making determinations as to what stays and what goes.

“When a person understands that the purpose of an expense is to increase income, that the purpose of an asset is to increase income, and the purpose of a liability is to buy an asset, now they have a lens through which they can make those decisions,” Tanner said.

According to Tanner, these are the 3 questions you should use to guide these decisions:

1.     Do you still need it?

2.     Can you get it somewhere else for less?

3.     Is this a want or a need?

When doing your budget, use your previous year’s profit and loss statement as a starting base. Factor in the historical information, such as how sales are trending, and adjust for other considerations such as direct and indirect renumeration fees and expense changes in payroll.  

Being strategic in your budgeting can significantly change your business, Tanner concluded, and understanding how your financial statements work with each other can help you make financially intelligent decisions.

References:

1. Benamoz D, Tanner A. Improving Cash Flow By Managing Your Budget. Presented at PDS 2020 Super Conference. February 28, 2020. Orlando, Florida.