FINANCE: DON'T DROWN IN DEBT!

Your business requires cashflow to pay for stock, suppliers, operational costs, taxes and service bank debts and these need to be matched with cash inflows from NHS remuneration, Over The Counter (OTC) sales and HMRC VAT refunds otherwise you could find yourself in a vicious circle.

If cashflow is not monitored, you will find the business juggling to settle its liabilities as they fall due. If suppliers are not paid on time, they will not send vital supplies which in turn results in customers going elsewhere. If staff/locums are not paid on time, your patients will suffer due to lack of staff or even poor service levels from demotivated staff.

HMRC can issue debt recovery proceedings against the business if debts remain unpaid. Lenders will be keeping a keen eye on the management accounts to ensure the business remains strong and is able to settle its financial obligations as they fall due, or they could take a decision not to refinance the debt or even call the debt in severe cases of cashflow mismanagement.

Dispensed items

If you are experiencing a drop in the average number of items you are dispensing over time, then it could mean customers could be going elsewhere. Loss of customers will mean less income for the business, and it is always difficult to get them back especially when they have gone to a local competitor. You need to keep an eye on this indicator and investigate any drop in numbers. Implement alternative strategies as to how you may increase this for example through partnerships with local community centres, GP surgeries, colleges, etc.

Sales mix

Is your business solely reliant on NHS and OTC sales? A modern-day community pharmacy needs to supplement traditional income streams with the introduction of services income. Pharmacy businesses have been feeling the squeeze in the top line as funding has stagnated with increase cost of drugs, staffing costs and inflationary increases in overheads. As a result, gross and net margins have dropped, impacting on cash flows adversely.

With the introduction of varied services, there are opportunities to increase the dispensing numbers as well as complementary OTC sales. Service income will add to the bottom line and to the cash flow. Pharmacy First scheme provides and opportunity to deliver additional services and should generate additional cash inflows.

NHS Remuneration

We are seeing that overall monthly remuneration levels have dropped but the payments are made on a timely basis and therefore it is important to ensure that you submit your scripts in time so that there is no delay in the payments - otherwise you could struggle to pay off your creditors as they fall due unless you have built up sufficient cash reserves.

HMRC VAT refund claims

Normally community pharmacy businesses are always in a VAT refund position, and this is an important cash flow. In the present climate, more business owners are reliant on their HMRC refunds to help ease cashflow. Ensure that your VAT return is processed in good time by your accountants so that the refund is paid without delay by HMRC, and the funds can be utilised towards paying suppliers. This can only be done if you implement a system of collating the monthly VAT records so that you send across complete information as soon as you receive the last supplier invoices for that month.

If you are behind with your VAT returns, HMRC will not release any VAT refund until all VAT returns are brought up to date and this could cause you to look for cashflow from other sources e.g. expensive short term debt until you receive the overdue refunds from HMRC. HMRC is increasingly inquiring into VAT returns that have been brought up to date before releasing all the outstanding VAT returns and that causes further delay and unnecessary costs for your business. We have a strict turnaround time for VAT returns provided all the information is complete and that helps the business as refunds come in on time.

Supplier payments

Most of your purchasing will be through few key suppliers and payment terms will be strictly agreed, with amounts due collected through direct debit monthly. If there is insufficient money in the bank, the direct debit will be returned, and the supplier will put a hold on your account which will in turn result in stock availability issues forcing customers to get their medication elsewhere. For a community pharmacy business, this would be a critical situation and therefore you must ensure that your suppliers payments go through.

If you foresee a cash shortage, speak to your suppliers in advance and agree a temporary payment plan for example the latest statement to be paid over 3 months or suggest a change in date when the supplier payment can be collected from the bank which could coincide with the NHS remuneration receipts. Another strategy is to ensure that you are only purchasing what is required and not stocking up on slow moving items as cash would otherwise be tied up in stocks. ?

Bank borrowings

With the rise in interest rates, all businesses have been experiencing increased debt servicing liabilities i.e. the repayments made to the bank on a monthly basis have increased and that has had a negative impact on the cash flow. A common misconception is that as long as you are able to make the repayments, the bank will be satisfied but that is far from the truth. The banks are scrutinising the management accounts, paying particular attention to the financial covenants in place.

One key financial covenant – debt service cost. This is how many times your Earnings Before Interest, Tax and Depreciation can cover the total bank loan repayments plus interest cost. Most lenders would have a minimum requirement of this covenant to be 1.5 times. If the financial covenants are breached, the bank will call for a conversation to discuss the financials and where facilities are up for renewal, stricter conditions are being imposed and in some cases the lenders have refused to refinance the loan.

You should ensure you speak to your accountant and understand the financial covenants. If your loans are up for renewal, you can speak to different lenders to see which one offers the best rate. Another option is to ask for a partially amortising loan whereby part of the loan would be interest only and this would lower the monthly repayments.

With no increase in funding, higher debt servicing costs, overhead cost increase and wage increases on the horizon, the old adage “cash is king” is ever so important in this industry. It is important to have the right systems in place so that you can foresee a cash flow problem and take corrective action in good time rather than being caught out and firefighting on all fronts to keep the business afloat. Communicating with your accountant quickly if you experience cash flow issues is paramount so that additional funding can be sourced.

This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here.?Vinku Shah FCCA, is a Chartered Certified Accountant and Partner at Silver Levene LLP.?He can be contacted on 020 7383 3200 or [email protected].