Pharmacy Financial Management: A Cheat Sheet
1. Understand Cash Flow Formulas And What They Mean
Cash flow formulas are used on company reports. They are important for making profitable investment decisions. You must understand the formulas to make sure that your independent pharmacy has enough money to keep going. These are some important terms to learn.
Cash Return On Sales
There is no complex formula for this one. It is simply how much cash is made only from sales.
Free Cash Flow
FCF shows the amount of money generated from daily operations after covering costs to continue operating. Costs to continue operations include net investments, dividends, interest and tax paid. You can put the remaining money away toward savings.
Cash Flow Coverage Ratio
This figure tells you if you have enough money to pay your bills and grow your company. Your cash flow coverage ratio is your operating cash flow divided by your total debt.
Cash Debt Coverage Ratio
This liquidity ratio tells you if you have enough funds to cover your short-term liabilities. Your cash debt coverage ratio is your net cash from operating activities minus your average total liabilities. The total liabilities should include the current year’s figure and any remaining amount from the previous year.
2. Use Technology To Maximize Workflow Efficiency
Dispensing robots and automation tools may be good investments for some pharmacies if the calculated savings outweigh the investment. However, you can improve your cash flow by using software to maximize each worker’s ROI.
With software programs, community pharmacy workers are not overwhelmed and can focus on accuracy and quality. There are software programs to make the following processes more efficient:
- Mobile prescription order management
- Central reporting and billing
- Cash flow tracking
- Pharmacy management
- Workflow management
- CMS rating assistance
3. Hire An Accountant To Avoid Reconciliation Mistakes
Account reconciliation requires accuracy throughout the entire year. Unfortunately, many smaller businesses make costly errors such as omitting new accounts, using outdated balances and similar mistakes. An inefficient reconciliation system damages the entire company’s financial integrity by providing a skewed perspective about its true financial status.
In the past, a community pharmacy owner could simply adjust an entry if an auditor found an error on the pharmacy’s financial reports. However, the implementation of the Sarbanes-Oxley Act in 2002 changed that for all businesses. When companies make material errors today, they must disclose a failure of internal control. If you are a pharmacy owner, this disclosure looks bad for your company.
Although there are software programs designed to minimize reconciliation mistakes, they do not prevent all of them. If you are a small pharmacy owner, the smartest option is to use an accountant. A responsible accountant knows what information to ask for and how to properly reconcile all types of accounts. If an auditor has questions related to reconciliation, the accountant handles them.
How To Get Started
The success and competitive edge of your independent pharmacy depend on your profits. If you need additional help with your pharmacy finances, click on the image below to speak with a PDS business adviser.