Most pharmacy owners use key performance indicators to some extent in monitoring their pharmacy. Invariably all of the KPIs will focus on trading, on the profit issues. Very few will focus on the balance sheet and, if they do, it will only be on stock. To ensure you are in a sound financial position, you need to bring the balance sheet more into the picture and connect it to your profit performance. Last month I wrote on the importance of cashflow and it is here where you make the RIGHT connection. By seeing whether your profit is enough to allow your balance sheet to function and remain in order, you can identify how much more you need to improve the business as well as make other important decisions which we will discuss.

You can go broke making a profit

Believe it or not – yes you can. Your performance KPIs may be a picture of best practice. Gross margin is strong, rent is not too high, wages are under control and the net profit as a percentage of turnover is above normal. So it is all going fine – the store could not be running better. Unless you are then managing what you do with that profit, things could come off the rails.

Let me give you some practical examples:

  1. In order to pay off debt you need to make a profit. In between making the profit and paying off the debt you need to pay tax. If you try to pay off your debt too quickly (over 5 years say instead of 10 years) the cash commitment to the bank might mean you have no cash left to pay the tax.
  2. If you pay for that new fitout out of cashflow, you could run out of cash to pay the bank, your creditors or the tax bill, and none of these people will be happy.
  3. If you decide to put the big bank balance into the new house instead of attending to business commitments, the same thing can happen.
  4. If make a profit on what you sell but have too much on the shelf that you are not selling, the cash tied up unnecessarily in stock can cause a problem.

 

You can go broke by growing too fast

Business growth is, well, good for business. Most owners only dream of double digit growth. However strong sales growth means climbing inventories, and climbing inventories means you need to sell through quickly to have the cash to pay the rising creditors bill. If the growth stops, you can find the cash is still tied up on the shelf when it is needed at a critical time.

Owners heading down the path of acquiring additional stores have their own growing pains to avoid.

  • Buying a business has various cash outlays to start with – deposit, stamp duty, general transaction costs
  • Once the business is open, there is a cash injection from the first months’ credit on stock
  • Sooner or later, repayments on the bank loan start
  • Somewhere in the middle of all this, it might seem like a good idea to do a refit – perhaps this is in the business plan at the time of the acquisition
  • And then you might add to these issues the growth / stock issue mentioned above
  • Then the principal repayments start on the previous two stores that were acquired
  • Then a second refit is done on the 'cash cow' store that has been supporting everything

Refits are generally (yes, there are too many exceptions) a good idea, but they do interrupt trading and therefore cashflow for a period of time, and it just may be it is at the WRONG time. You can see where all of the above is heading, there can be one almighty train crash if there is no connection between what profits are being generated and how the balance sheet is being managed.

How do YOU connect?

I refer the reader again to my article last month on the REAL story about your business, your cashflow statement. I recently painted the picture for an owner of three businesses through a one page cashflow statement. It was an eye-opener. Whether you have one pharmacy or own five or work with a group who might have a dozen, the picture can be drawn on just one page. The questions are simple – what do you do with the profits you make? Where have the profits gone? Why is it so hard to pay my bills? I get them a lot from exasperated owners who work hard but to them it just doesn’t seem to be sticking, the bank balance is NOT improving. A one-page cashflow statement can answer all of these questions.

With business performance continuing to be under the microscope, pharmacists who are great at the detail can also narrow the focus too much. Yes, it is important to get wages under control, but it is just as important that you have a strong balance sheet where ALL of your commitments can be met and you have room left over to continue to invest in the business. So make the connection now between profit and assets and know where you cash is going, that’s where the REAL story is.