Improving Cash Flow

Question 1

Simple Cash Flow model

Answer 1

Cash flows out of business to pay for inventory –> inventory sold for cash –> cash brought into business –> starts over

Question 2

Complications of the simple cash flow model

Answer 2

1. Pharmacy usually buys inventory on credit (creates time lag)
2. Pharmacies frequently sell on credit (creates time lag)
3. Cash flows out of the pharmacy to pay for expenses such as salaries, utilities, and rent

Question 3

Basic means of improving cash flow

Answer 3

1. decrease the amt of cash invested in the pharmacy
2. slow the amt and rate of cash flowing out of the pharmacy
3. increase the amt and rate of cash flowing into the pharmacy

Question 4

Ways to accomplish basic means of improving cash flow

Answer 4

1. Proper control of inventory
2. maintenance of gross margin
3. investment of idle cash
4. proper control of accounts receivable
5. delay of disbursements for accounts payable
6. minimization of operating expenses

Question 5

Inventory quality

Answer 5

• carrying the appropriate inventory has to the effect of reducing the demand for cash
• un-salable inv requires same cash investment as salable inv
• un-salable inv decreases inv turnover and increases total inv investment

Question 6

The 80/20 rule

Answer 6

“80% of inventory probs may come from 20% of your inventory” and “20% of your inventory may account for 80% of your sales”

Question 7

Shrinkage

Answer 7

defined as merchandise lost through breakage or theft

High shrinkage= a lot of lost merchandise so want to control shrinkage

Question 8

How can pharmacies maintain or improve shrinking gross margins?

Answer 8

• emphasize high-margin profits
• selection of third party contracts= carefully select them to increase the # of 3rd party reimbursements
• price increases
• decrease product costs= lower product costs will result in an increased gross margin and consequently more cash flow/profitability

Question 9

Risk when investing idle cash

Answer 9

common stock purchases are considered very risky
passbook savings accounts are risk free
**generally, the higher the potential return the greater the risk!!

Question 10

Opportunity cost

Answer 10

time the pharmacy’s cash is tied up in accounts receivable or the time b/w when the sale is made and the customer pays the bill
the opportunity cost of the investment of cash in an account receivable or credit program is equal to the interest that could be earned in the next best investment

Question 11

Accounts payable management

Answer 11

slowing down payments to suppliers, bills should be paid soon enough to receive cash discounts but no sooner
know when the suppliers close books, b/c purchases made after the closing date will extend payment the longest