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Cash flow forecasting

NPA Essential

Cash flow forecasting

Cash flow is the lifeblood of your pharmacy. You could provide a great service for your customers, but without adequate cash flow, you’re not going to be able to operate effectively

Cash flow is the accessible money you have in your pharmacy at any given time. It is the money you use to pay the rent, business rates, utility bills, staff wages, suppliers and VAT, to name but a few.

Like most pharmacies, you will probably have a time lag between dispensing and getting paid, so you have to make sure there is enough cash in the business to cover these expenses until your payments come in.

A cash flow forecast is a vital and relatively simple piece of financial planning that uses the available information you have to predict how much money will be coming in and going out of your pharmacy at any given point. A good cash flow forecast is one of the most important pieces of financial planning you can do, so the following tips can get you started:

1. Err on the side of caution

Being realistic or even pessimistic when drawing up a cash flow forecast will give your pharmacy the very best chance of survival. Underestimating your incomings and overestimating your outgoings can help to ensure there’s always a healthy level of cash in your business.

If you do not predict your income sensibly, a cash flow forecast is not worth the paper it’s written on. Estimating your sales will grow by 20 per cent over the next three months is all well and good, but if your sales remain the same, will you have enough cash to pay your bills?

2. Account for the time lag

Think carefully about when money will actually enter and leave your account.

You might invoice for a big order in January, but if you give payment terms of 90 days, the money will not be in your account until April. During this time, it’s essential you still have money in the pharmacy to pay your ongoing expenses.

The same can be said for money leaving the company. If you use a business credit card to pay bills or purchase new equipment, make sure you consider when the money will actually leave your account.

3. Build in best- and worst-case scenarios

A forecast is simply an educated guess, and although you might have a good idea of how many sales you’re going to make next September, you really can’t be sure.

One way to combat this uncertainty is to build in a best-case and worst-case scenario. This will help to steady the ship in difficult times. If you’re predicting sales of £150,000 for the year, draw up a cash flow forecast with sales 20 per cent higher and 20 per cent lower than this figure.

4. Factor in seasonality

One of the biggest mistakes a business can make when forecasting cash flow is to assume its sales will remain constant throughout the year.

Some pharmacies will experience seasonal variations to some extent. If your sales usually fall during the winter months, make sure this is represented in your forecast. Those times when income is at its lowest
are exactly when an accurate cash flow forecast will help your business the most.

The NPA offers members a range of business solutions and advice to support, promote and grow pharmacy business.

KPMG Small Business Accounting is an NPA Business Partner. Members who sign up for the KPMG service are assigned a dedicated accountant, and get the first three months of accounting, bookkeeping and tax support for free. Find out more at servicesandsupport/business- support/business-partners.

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NPA Essential