Improving Cash Flow Flashcards
Cash Flow
Money In –> cash flows out of the business to a purchase inventory –> inventories are sold for cash –> cash is brought into the business (back to the top)
Complication of cash flow
Buy inventory on credit
Sell on credit
Pay for expenses
To insure that there is sufficient supply of cash to cover expenses
The owner must take steps to increase gross margin and decrease expenses
How to improve cash flow?
Decrease cash invested
Slow the amount and rate of cash flowing out of the pharmacy
Increase amount and rate of cash flowing into the pharmacy
Ways to accomplish improving cash flow?
Proper control of inventory Maintenance of GM Invest idle cash Proper control of accounts receivable Delay of disbursements for accounts payable Minimize operating expenses
Appropriate Inventory size
Too much = too much money spent
Too little = may not be able to meet demands
Inventory Quality
Carry the appropriate inventory has the effect of reducing the demand for cash
Unsaleable inventory = cash invested, decreased inventory turnover and increase total inventory investment
80/20 Rule
80% of your inventory problems may come from 20% of your inventory or 20% of your inventory may account for 80% of your sales
How to apply the 80/20 rule?
Determine the overall sales dollars produced by each category of items
Break down the dollar sales into three specific classes
Quantify the number of units that were necessary to attain the dollar sales
Develop a chart
After you review your inventory, what should you be asking yourself?
Am i carrying the right mix, right amount?/
Can i reduce the slow selling items or not carry them at all (would i be able to get them quickly if I needed them)
Control shrinkage?
Merchandise that must be paid for but generate no cash income
GM
Difference between the price at which pharmacies buy merchandise and the price at which they sell it
How do you maintain improve shrinking GM?
Emphasize high margin products
Careful selection of third party contracts
Price increases,
immediately pass on manufacturer’s price increase to consumers
Failure to pass on = decreased GM = reduced cash flow
Decrease product costs
Take cash discounts
Utilize the lowest cost source
Participate in buying groups
Lower product cost will result in
an increased GM and consequently more cash flow/profitability
Invest idle cash
Increased profitability and cahs flow
Things to consider when investing idle cash
risk due to potential loss of money
Stocks = Risk
Passbook savings accounts are risk free
Higher the potential return = greater risk
Liquidity
Investment that can be rapidly, readily and cheaply converted to cash
Return on investment
Higher the potential return the greater the risk
Ways that accounts receivable (AR) hinder cash flow
Credit program = investment in cash, slow cash inflow
Amount of cash invested = amount of outstanding AR
% may never be collected and = bad debt
Define Opportunity Cost
Time between when the pharmacy’s cash is tied up in AR or the time between when the sale is made and the customer pays
Minimize the amt of cash invested in extended credit how?
Carefully screening
Send bills promptly and regularly
Add finance charge
Follow up on overdue accounts
Accounts Payable Management
Pay bills soon but no sooner than needed for discount
Extend payments as long as possible
Know when suppliers close books
Purchases made after closing date will extend payment the longest
Decreasing expenses
Decreases cash outflow, improving cash flow and leaves more cash for profit
- Needs to done w/o compromising quality or when poor cash flow makes it a necessity
