You have heard the expression CASH IS KING. Nothing could be truer when you buy or start a community pharmacy. Below we have outlined the working capital needs for both starting and buying a pharmacy.
Starting a Pharmacy
The number one reason for a startup pharmacy to fail is not having enough cash in the first couple of years of business. On average in the first 6 months of operation a pharmacy will have approximately $75,000 in expenses per month. Day one you have $0 dollars of revenue. In month one you may have sales of $25,000.However the majority of that $25,000 in sales will not to you for 27 days due to the delay in receiving payment from insurance companies. In that first month you will probably spend $40,000 in cash just to pay the bills of the business. In month two you may double your sales to $50,000 however you will only collect the $25,000 that was billed in the previous month. This creates a major cash flow strain as your expenses will increase due to buying more inventory to support the $50,000 in sales. So even though your sales grew you have a cash shortage that is as much or more than the first month. Within the first 2 months you have now spent $80,000 at least and though the amount of the cash shortage will become smaller over time it will continue for 6-12 months. In summary, if you are undercapitalized you will go out of business even if you grow quickly.
Buying a Pharmacy
One of the biggest mistakes we see made by those purchasing a pharmacy is not getting working capital as part of the loan. You might be thinking why would you buy a business that needs working capital, shouldn’t that pharmacy cash flow? There are two problems, first back to how insurance companies pay as mentioned above. Let’s say you buy a pharmacy on August 1. Anything billed July 31 or before is money that is owed to the seller (assuming you do not purchase accounts receivable). Everything billed August 1 is your money but those dollars will not be received for 20-30 days and you have to cover the bills of the pharmacy for that time period. In a pharmacy with annual revenues of 3 million those expenses could be $200,000. Secondly most pharmacies that are purchased require improvements. These may include a remodel, new marketing strategies, new services, new employees, etc. All of these items cost money and it is better to capitalize them and pay for them over 10 years than to drain the cash of the business because as you have seen from this blog post keeping the cash your business generates is critical to the success of your business.