When most pharmacy owners think about financial performance, their attention naturally gravitates toward the profit and loss statement. After all, it tells you how your business performed over the past 12 months. But as a finance professional, my first stop is always the balance sheet – and here’s why.
Why your balance sheet matters
The profit and loss statement is a snapshot of a single year. The balance sheet, on the other hand, represents the financial story of your pharmacy over its entire life. It’s not just a static report; it’s a powerful tool that can reveal opportunities to unlock cash and strengthen your financial position.
Common sources of funds include:
- Cash on hand
- Debtor collections
- Reducing inventory
- Limiting prepayments
- Financing assets rather than purchasing outright
The balance sheet also shows where funds are leaving the business. For example, you might be paying wholesaler accounts, suppliers, taxes, employee entitlements, and loan repayments. But there’s one area that’s often overlooked – drawings and related party loans.
The Silent Cash Drain
Negative retained earnings indicate a loss, but drawings, dividends, and related party loans tell a different story. Instead, these represent cash generated by the business that has flowed outside the business. For non-financially trained owners, this is easy to miss but it’s the first thing I look for. Why? Because it answers two critical questions:
- Is the business truly in good health?
- Is the owner living beyond their means—or worse, in a partnership, has one owner unknowingly lent money to another? Partners, Shareholders, Trustees, need to have the difficult conversation with each other and with your accountant.
Ignoring these signals can lead to serious cashflow challenges, even when the profit and loss looks healthy.
Practical Steps to Improve Cashflow
If you have surplus cash, make it work for you:
- Use an offset account against your pharmacy loan to reduce interest expense.
- Review your debt terms regularly – a 1% interest saving is like a 1% improvement in trading terms.
- Manage inventory efficiently: aim for stock turns greater than 6x for OTC lines and 14–16x for dispensary lines.
- Avoid bulky stock purchases based on promised discounts – they often tie up cash unnecessarily.
- Be prudent with high-cost drugs and avoid overstocking.
- Collect customer debts promptly, especially aged care patient accounts.
- Log Medicare claims correctly the first time to avoid delays.
- Don’t let strong pharmacies subsidize weaker ones – this only delays tough decisions and drains cashflow.
Your balance sheet isn’t just an accounting requirement – it’s a roadmap to financial resilience for your pharmacy. By understanding where cash is locked up and where it’s leaking out, you can make smarter decisions that protect your business and your future.