Get insider secrets on improving your independent pharmacy’s cash flow.
Improving your pharmacy’s cash flow is more critical than ever before! There are so many threats to your business. From the 2024 DIR fee apocalypse to aggressive audits to dwindling profits. Now is the time to shore up your cash flow so you can sleep well at night.
Here are my tried and true secrets to improving pharmacy cash flow.
- Decrease Inventory
- Get Longer Payment Terms
- Restructure Debt
- Reduce Expenses
- Collect More Payments
- Increase Profits
- Leverage Other People’s Money
Let’s dive a bit into each one. Members of Pharmacy Badass University can listen to our mastermind call on improving cash flow HERE.
1. Decrease Inventory
Do you know what your inventory goal should be? You are not alone if you don’t. Most pharmacy owners have no idea what their ideal inventory goal should be. You can get a rough estimate by taking your annual COGS (cost of goods sold number) and dividing by 20 for a high number and by 24 for a more aggressive number. The numbers 20 and 24 represent a minimum level of turns for your inventory. The higher your turns, the lower your inventory and the better your cash flow is. All PBU Members have access to our Inventory Optimization Course, which takes you through the entire process step-by-step and gives you the handouts and resources to make this easy.
Think of your inventory as a form of a cash bank account. Each bottle on your shelf represents a stack of dollar bills. You can turn those bottles back into cash by not replacing them when dispensed or by returning overstock to the wholesaler. Most pharmacies have between $20,000 to $50,000 of excess inventory. I recommend using Flash Returns for outdated items to get the maximum amount for your dead inventory.
2. Get Longer Payment Terms
One of the easiest ways to ease the pain of tight cash flow is to have more time to pay your bills. Instead of paying for everything when you place an order, ask if you can be invoiced. For companies that already invoice you, ask to push back your due date by a week. This ask is hyper-critical for your primary wholesaler. Even a few days can be a massive difference in your cash flow.
For prescription purchases, I recommend switching to Real Value Rx or RxCherryPick for an immediate boost to cash flow because they have 30-45 day payment cycles, which is huge! In a couple of months, you’ll have a ton of extra cash in your bank account because you’re holding on to your money instead of paying your wholesaler early. It’s incredible what it does for your cash flow!
3. Restructure Debt
Interest rates have been going up, but they’re still historically low compared to the last several decades, but if you have any debt, you might look into refinancing it. Refinancing could add time to your loan, but a lower monthly payment could be worth it if you are struggling with cash flow. I highly recommend you talk to banks and lenders before you actually need it. First Financial Bank has a wonderful pharmacy division that is worth exploring your options with.
4. Reduce Expenses
A dollar saved is a dollar earned. Improving your cash flow and profitability by lowering your expenses is much easier than increasing your revenues. Here’s why. A typical pharmacy has a net profit percentage of about 5%. This percentage means that for every dollar of income you make, you get to pocket 5 cents. I know it is a bit saddening. However, when you lower your expenses by a dollar, that whole dollar goes to your bottom line. It is 20 times more effective!!
Here are some ways to evaluate your expenses:
- Make sure your payroll is under control at <13% or even <11%
- Negotiate for lower prices, keeping old costs with a larger order
- Get a detailed P&L and review every line and evaluate each expense. Ask yourself, is this…
- Necessary?
- Making me money?
- Can it be reduced or eliminated, or put on hold?
5. Collect More Payments
Reconcile your third-party claims to ensure you’re collecting all your money. Your PSAO should offer reconciliation; not all are stellar, either. Plenty of third parties like Provider Pay, Net-Rx, or Inmar do third-party reconciliation.
Consider having customers pay credit card fees. It is perfectly legal for most pharmacies to have your patients pay their credit card fees. There are various local rules you should be aware of. Some governments may not allow you to charge a fee or surcharge; instead, you can offer a cash discount. Regarding copays, you are good as long as you provide options that patients can pay without any fees. Paying with a credit card is an optional service, and you can charge extra for it if you choose to. Learn more in this recent YouTube Video with our guest Carter Musgraves.
6. Increase Profits
Here is an important lesson: profit does not equal cash. And, it can be easier to increase your cash flow if you are more profitable. Here is more detailed information on the difference between Profit and Cash Flow. Here are just a few of our favorite products to increase profits.
Sell Higher Margin OTC Items
One effective way to increase profits in your pharmacy is to sell higher-margin over-the-counter (OTC) items. These products can be sold directly to patients without a prescription, and they often have a higher profit margin compared to prescription medications.
Here are some examples of high-margin OTC items that we are loving right now:
- Nitric Oxide from Approved Medical Solutions
- Nudora Weight & Inflammation Probiotic
- Dispensing OTC COVID Tests
Our favorite non-PBM high-profit strategy is to direct bill work comp. Learn more about it HERE. Paying less for your drugs is a great way to boost prescription profits. Get an account with MatchRx and start saving.
7. Leverage Other Peoples’ Money
Using other people’s money to run your business allows you to keep more of your own! Having access to others’ money can help in times of preparing for a cash crunch or helping to bridge the gap between cash flow deserts.
Get a Credit Line Before You Need One
I always recommend having a credit line, even if you think you are not going to use it. The reality is you don’t know you are going to need it until you do. Then when you really need it, it is hard to get.
Use Credit Cards… Wisely
Credit cards can be a fantastic way to extend your cash flow. You can pay a bill on its due date and have extra time before paying the credit card bill. Our Tip: Use it wisely. I do not recommend keeping a balance on your credit card because the interest you generally pay will outweigh any benefit. Our choice of credit card would be the Plum Card by American Express. This card allows you to make purchases, and as long as you pay the minimum, you can keep the balance on the card for 60 days with 0% interest!!!
With the upcoming changes to DIR fees in 2024, now is the time to maximize your cash flow and build up a war chest as big as possible. For additional support and access to amazing resources, we invite you to check out our membership at Pharmacy Badass University.
