Vinku Shah explores how pharmacies can identify potential cashflow problems and implement strategies to navigate these challenges…

Your business requires cashflow to pay for stock, suppliers, operational costs, taxes and service bank debts and these need to be matched with cash inflows from NHS remuneration, OTC sales and HMRC VAT refunds, otherwise you could find yourself in a vicious circle. HMRC can issue debt recovery proceedings if debts are unpaid and lenders will keep an eye on the management accounts to ensure your business can settle its financial obligations.

Dispensed items

If you experience a drop in the average number of items you are dispensing, it could mean your customers go elsewhere. You need to implement alternative strategies, for example partnerships with local community centres, GP surgeries, colleges, etc.

Sales mix

Is your business solely reliant on NHS and OTC sales? A pharmacy needs to supplement traditional income streams with services income. For instance, Pharmacy First provides an opportunity to deliver additional services and generate additional cash inflows.

NHS remuneration

We are seeing that overall monthly remuneration levels have dropped but the payments are made on a timely basis and it is important to ensure you submit your scripts in time so that there is no delay in the payments otherwise you could struggle to pay off your creditors as they fall due unless you have built up sufficient cash reserves.

HMRC VAT refund claims

Normally community pharmacy businesses are always in a VAT refund position and this is an important cashflow. In the present climate, more business owners are reliant on their HMRC refunds to help ease cashflow. Ensure that your VAT return is processed in good time by your accountants so that the refund is paid without delay by HMRC, and the funds can be utilised towards paying suppliers.

This can only be done if you implement a system of collating the monthly VAT records so that you send across complete information as soon as you receive the last supplier invoices for that month.

If you are behind with your VAT returns, HMRC will not release any VAT refund until all VAT returns are brought up to date and this could cause you to look for cashflow from other sources e.g. expensive short-term debt until you receive the overdue refunds from HMRC. HMRC is increasingly inquiring into VAT returns that have been brought up to date before releasing all the outstanding VAT returns and that causes further delay and unnecessary costs for your business.

We have a strict turnaround time for VAT returns provided all the information is complete and that helps the business as refunds come in on time.

Supplier payments

Most of your purchasing will be through few key suppliers and payment terms will be strictly agreed, with amounts due collected through direct debit monthly. If there is insufficient money in the bank, the direct debit will be returned and the supplier will put a hold on your account which will in turn result in stock availability issues forcing customers to get their medication elsewhere. For a pharmacy, this would be a critical situation and therefore you must ensure that your suppliers payments go through.

If you foresee a cash shortage, speak to your suppliers in advance and agree a temporary payment plan for example the latest statement to be paid over three months or suggest a change in date when the supplier payment can be collected from the bank which could coincide with the NHS remuneration receipts. Another strategy is only purchase what is required and not stock up on slow moving items as cash would otherwise be tied up in stocks. 

Bank borrowings

With the rise in interest rates, all businesses have been experiencing increased debt servicing liabilities i.e. the repayments made to the bank on a monthly basis have increased and that has had a negative impact on the cash flow. A common misconception is that as long as you are able to make the repayments, the bank will be satisfied but that is far from the truth. Banks are scrutinising the management accounts, paying particular attention to the financial covenants in place.

One key financial covenant is debt service cost. This is how many times your earnings before interest, tax and depreciation can cover the total bank loan repayments plus interest cost. Most lenders would have a minimum requirement of this covenant to be 1.5 times. If the financial covenants are breached, the bank will call for a conversation to discuss the financials and where facilities are up for renewal, stricter conditions are being imposed and in some cases the lenders have refused to refinance the loan.

You should speak to your accountant and understand the financial covenants. If your loans are up for renewal, speak to different lenders to see which one offers the best rate. Another option is to ask for a partially amortising loan where part of the loan would be interest-only and this would lower the monthly repayments.

With no increase in funding, higher debt servicing costs, increasing overheads and wages, cash is king. Communicating with your accountant quickly if you experience cashflow issues is paramount so that additional funding can be sourced.

Vinku Shah is director-pharmacy at Silver Levene.