Ask an accountant: Top tips for managing your cashflow
Times are hard for community pharmacy. But careful planning can help keep contractors in the black, says specialist accountant Atif Butt
The past few years have seen a steady decline in pharmacy numbers across the UK. The BBC recently reported that the number of pharmacies in England has fallen by 160 over the last two years, leading to the lowest number since 2015. And this year, we’ve seen supermarket groups and multiples announce sales and potential closures of hundreds of branches across the country.
The unprecedented upheaval of recent times has seen all business sectors contend with rising prices. However, community pharmacy, with its fixed funding model, has been particularly badly hit because the sector doesn’t have the option of raising the prices it charges to its main customer – the NHS.
In September 2022, the National Pharmacy Association (NPA) published a report warning that, without additional government funding, thousands of pharmacies were at risk of closure in the coming years. Representatives from across community pharmacy wrote to the Prime Minister Rishi Sunak this year to warn that without further government funding there would be an “unprecedented” number of closures, with many contractors concerned that their business would not “survive 2023”.
Meanwhile, chief executive of the Association of Independent Multiple Pharmacies (AIMp), Dr Leyla Hannbeck, has recently warned that there is a shortfall of £1.1 billion in funding for independent pharmacies every year. "This has led to many pharmacies severely struggling with cashflow problems," she told BBC Radio, adding that 600 more pharmacies could close this year unless increased support is given.
Speaking to our clients, we are hearing more and more stories similar to this. I recently went to visit one of our oldest clients, and they told me things have never been so bad in their 30-plus years in the sector. “The system is broken. Prices are out of control and often we need to decide how much we’re prepared to lose on filling a prescription instead of what profit we might make,” they said. “Locum rates have shot up so much that I could shut up shop and make more money working as a locum!”
Another client I spoke to on the same day told me their situation was becoming increasingly precarious. They said: “We’re working harder than ever to provide a great service to the community, but we’re not seeing the results reflected in our bank balance.”
Both clients said their biggest problem at the moment was poor cashflow, with rising prices and high interest rates increasing the pressure to such an extent over the past year that they had sometimes been forced to put money into the business instead of taking it out.
Are things looking up?
Earlier this month, the government finally bowed to sector pressure and promised a £645m investment in community pharmacy services over the next two years. The investment was announced as part of a new government and NHS blueprint setting out plans to improve access to primary care, including the upcoming Pharmacy First service. Under the service, patients who need prescription medication for seven common conditions will be able to get this directly from a pharmacy.
Janet Morrison, chief executive of Community Pharmacy England (CPE), formerly the Pharmaceutical Services Negotiating Committee (PSNC), said the money was “the biggest investment in pharmacies for many years – [it] is a huge vote of confidence from government, the NHS and from ministers”.
So what does this news mean for the funding crisis in the sector, and how far will it go to alleviate the cashflow concerns of community pharmacy operators? At the moment, it hasn’t been decided how the £645m funding is to be distributed between the Pharmacy First, hypertension case-finding and oral contraception services, with this being subject to detailed negotiations.
Although the plan is to launch Pharmacy First by the end of 2023, this seems quite ambitious and, again, the exact launch date will be confirmed once negotiations between the Department of Health and Social Care (DH) and CPE are completed.
While the additional funding is welcome, it is clear that it won’t immediately address the cashflow problems many pharmacy teams have been struggling with for the past year or so. Nor does it provide long-term security, as the investment promised is for just the next two years. But it does at least offer some good news, and a prospect of better-funded times to come.
The challenge now for pharmacies that have been having cashflow issues will be to try to manage this effectively over the coming months while also making sure they are prepared when the new services are launched.
Getting on top of the challenge
If you are concerned about your cashflow or worried about the future, it’s helpful to understand the monthly cashflow cycle of your business. The bank balance of most pharmacies will be highest when the monthly NHS payment comes in and lowest when supplier payments and salaries have gone out.
Ideally, you will always have a buffer of ‘working capital’ in the business so the balance doesn’t dip below zero. As pharmacies usually reclaim VAT from HMRC, you should do monthly VAT returns so that you receive VAT refunds more frequently.
You can also work with your accountant to prepare a cashflow forecast, which is a report that looks at the funds you are expecting to come in and out of the business over the next few months. This lets you track how your cash position is expected to move over time and helps to identify periods where you may have a surplus or shortfall so you can plan ahead and be prepared for the future. This can also be a great first step in looking at your cash incomings and outgoings and finding areas where you can improve.
If you are not doing so already, seek to maximise existing income streams and diversify into other areas including private services like in-house vaccination clinics. Also, make sure you’re claiming for everything as soon as possible. This is even more important now, with the Pharmacy Earlier Payment Scheme dependent on timely filings for earlier payments.
Review your expenses and look for areas where savings are possible. Negotiate on your supply costs – particularly on drug and stock purchasing. Staff costs are also an important area to focus on as they form a high proportion of your overall costs. Shop around, keep an eye on your utility bills and other expenses, and keep pushing for the best possible deals.
Planning for the worst-case scenario is key. If you are concerned about your cashflow position, it’s a good idea to look at different sources of finance that are available so you are aware of your borrowing options.
Where possible, your own cash savings or family savings (ie the bank of mum and dad) are usually the best options because you won’t be at the mercy of unpredictable interest rates. An overdraft facility or short-term loan can also be popular – but, of course, it’s important to shop around for the best deals.
While pharmacies usually have good working relationships with their banks, if you’re considering commercial lending, it makes sense to also talk to a finance broker who specialises in the sector to explore all your options. With interest rates at historically high levels and predicted to continue rising in the short term, it’s more important than ever to compare rates, fees and the terms of each alternative to find the one that’s right for your business.
Invoice finance or factoring is where a lender advances you funds based on the amount you’re currently owed by your customers. Factoring charges can be confusing to understand and compare. If you are considering raising funds for your business through factoring, talk it through with your accountant first. They can help to look at your individual circumstances and advise you accordingly so that you don’t end up making any costly mistakes.
Managing cashflow challenges will be crucial for community pharmacies as we wait for the introduction of extra funding and the roll out of new services.
The sector’s resilience and adaptability will be key to navigating through these cash-strapped times and securing a sustainable future.
Atif Butt (FCCA) is senior accountant at Hutchings Accountants Ltd – specialist pharmacy accounting