“I feel like I’m making money, but I don’t have any” is something Florida CPA Michael Floyd hears from independent pharmacy owners all the time. The first thing he explains to them is that cash flow and profit are not the same. Profit is theoretical, whereas cash is real. You can be turning a profit on paper and still be left with little to no cash on hand. 

The many grants and PPP funding available to pharmacies throughout the pandemic helped independent pharmacy owners with cash flow, but they also caused many to lose sight of the bigger profit picture. While these programs helped fix temporary cash flow issues, they gave many independent pharmacies an inflated sense of profits. Floyd describes these funds as a bandaid and now that they are running dry, he’s getting calls for advice on a long-term solution to financial health. The first step to achieving this is to solve the mystery of cash flow versus profit once and for all. 

Accounts Payable and Receivable 

Two of the key accounts affecting your cash flow are accounts payable and accounts receivable. Accounts payable are amounts that you owe to creditors and accounts receivable are amounts due to you from revenue sources like PBMs. When you pay off an account payable, it has a negative effect on your cash flow and no effect on your profit. When you get paid for an account receivable, it has a positive impact on your cash flow, but, again, no impact on your profit. These transactions do not affect your profits because they were already recorded as revenue and expenses on the dates they were accrued (assuming you are using the standard accrual system of accounting).  

Floyd recommends collecting your accounts receivable as early as possible to improve your cash flow. This will also help bring your cash flow figures closer to your profits. On the flip side, he suggests waiting as long as possible to pay your accounts payable unless you will receive a discount for paying early. If your vendors offer an early payment discount, then pay sooner. 

Inventory  

Another account that often affects your cash flow but not your profit is your inventory. When you purchase and pay for your inventory, it has a negative impact on your cash flow because you are turning your cash into inventory. On the profit side, these purchases won’t be reflected on your income statement until after the goods are sold. Having a large inventory on hand is a common reason independent pharmacy owners experience cash flow problems. You can work with your PDS coach to better predict the needs of your patients to decrease the amount of inventory you need to shelve. 

Understanding Your Statement of Cash Flow 

Profits are displayed on your income statement while cash flow are reflected on your statement of cash flow. These statements are typically generated alongside one another, but the cash flow statement is severely underutilized when it comes to independent financial analysis. This is an area that PDS coaches work closely with clients on to help foster a better understanding of all the pharmacy financials.  

On your statement, you will see three sections: operating, investing, and financing. These sections are different from what appears on your income statement and balance sheet and they give you different insights into the performance of your pharmacy.  

Operations is the first section that you need to focus on. If you have a positive number in the operations section of your  statement, it means your day-to-day operations are generating cash. That’s extremely important. Investing gives you insight into changes in cash flow related to the purchase of assets like equipment while financing lets you know if your cash is coming from a source used to finance operations. Note that the grants and PPP funds would appear in the financing section of your cash flow statement and not the operations section. If you are not on payroll in your pharmacy, the dividends and draws that have been paid out to you will also appear in the financing section. Categorizing your cash flow this way helps you to differentiate between funds generated by business activities and those coming from outside sources. 

Improve Your Finances With PDS 

When you become a PDS member, you have the option to pass on your bookkeeping to our experienced PDSfinancials team. If cash flow and profit remain a mystery for you, our team of professionals can help you analyze all of your financial statements on a monthly basis and create a budget to help you make better decisions for improving your finances. We also provide a complementary financial analysis for all new PDS members. Get in touch with us today to learn more.