This site is intended for Healthcare Professionals only

cash flow.jpg
Running Your Business bookmark icon off

Pitching for help with cashflow

As community pharmacy faces a cashflow crisis, Leela Barham play's devil's advocate on the case for government-backed loans

It’s easy to point to financial pressures on community pharmacy; it’s all over the media. The sector is being hit with rising running costs – for heat, light and fuel for deliveries. Some have seen sky high costs for renewing rents. Those who borrowed to invest will have higher costs to service debt as interest rates have gone up. A minimum wage increase is just around the corner. Products are being dispensed daily at a loss. Everywhere you look, cashflow is under pressure.

Pankaj Patel, managing director of Aequitas chartered accounts and registered auditors, points to how his firm has “contractors who have seen more than a 50 per cent fall in cash holding. For example, one had £190,000 in the bank, but 18 months later, that’s down to £70,000.”

Managing cashflow is hard. Alasdair McPherson, head of partnerships at business finance specialist and online broker Rangewell, says that the pressures on pharmacy owners mean “it’s a perfect storm when it comes to cashflow”. However, there are still those who are managing, even in these difficult times. Andy Casey, head of medical, corporate and commercial banking at Santander UK, says: “We are yet to see any of our community pharmacy clients being negatively affected by cashflow problems.”

The Government helped community pharmacies when they needed an overdraft or loan in the past. At the height of the Covid-19 pandemic, it offered the Recovery Loan Scheme, guaranteeing 70 per cent of the finance to the lender. Community pharmacies – like other businesses – could have got a better rate with government backing than without. That scheme ended in June 2022. Could the sector make the case to bring something similar back?

NPA board member Hemant Patel hopes this is possible. He says: “During Covid, the Government provided some financial support. Now we have high inflation and all the other financial pressures. In the public interest – preventing pharmacy closures and supporting pharmacists to concentrate on the quality of service – it should be providing the option of a government-backed loan.”

Making a special case

The financial pressures from higher costs for utilities as well as servicing debt are the same pressures that all UK businesses are experiencing. Mr Casey makes the point: “Inflationary pressures, rising interest rates and increased wages are putting margins under pressure and this ultimately leads to a tightening of operating cashflow, but these operating challenges are not unique to community pharmacies – they are shared by many businesses spanning a wide range of industries in the UK.”

Given that other UK businesses are feeling the pinch, how can the sector successfully lobby to secure government-backed loans now? 

The most obvious differentiator for community pharmacies is their public service, which sits alongside retail and private services, but which is a big influence on their cashflow. The most visible public service element of community pharmacy’s work is dispensing medicines, but that is by no means the only way the sector supports the public’s health. 

NHS drug costs can be around 60 per cent of the costs of community pharmacy business. And the Government has already acknowledged how there can be issues with reimbursement for dispensing drugs against NHS prescriptions that can affect cashflow.

“Inflationary pressures, rising interest rates and increased wages are putting margins under pressure and this ultimately leads to a tightening of operating cashflow”

Delivering that public service can only happen when there are pharmacists, and an accessible community pharmacy, available to do so. It’s the same argument as that deployed in the NHS more generally; just because there is an entrepreneurial element to a community pharmacy does not mean that clinically-trained staff should be taken for granted. “Community pharmacy is a private investment by a pharmacy owner to provide a public service,” says Mr Patel.

Financial help from the Government could help the sector to continue to deliver, and to deliver well too. “[Financial pressures] are having an impact on the health of pharmacists,” Mr Patel explains. “We’ve got pharmacists focusing upon financial challenges, rather than doing their job as a clinician. It’s a distraction that is affecting the quality of work and quality of life.”

Upfront investment

Contractors invest upfront to be ready to dispense as and when a patient presents a prescription, but they won’t always know precisely what the reimbursement rate under the Drug Tariff will be. It will depend upon what the prescription is for and what the market price was when it was purchased, which can mean dispensing at a loss. Hemant Patel describes this as “driving blind.” 

Cashflow can be affected too when there are supply shortages. A Statista survey of pharmacies – including community pharmacies in the UK – conducted from November 2021 to January 2022 across 27 countries found that more than 96 per cent experienced financial loss due to the time invested in mitigating shortages. 

That’s not all; losses came from operational changes such as minimum stock keeping and import fees as well as having to pay higher prices. With anecdotal evidence mounting that the system is breaking down further in the UK, it’s clear that supply shortages hurt the bottom line. It’s true that other businesses have to invest upfront and can find it hard to source materials, but they typically won’t have the Government determining how much they will be paid against materials they supply.

It’s the nature of the product and services being delivered here that are important; these are medicines and clinical services, not just widgets. And unlike many other small businesses, community pharmacy owners can’t staff their pharmacies with just anyone. Pharmacists are needed in store; other staff have a high degree of skill and, increasingly, formal qualifications. 

Competition for pharmacists has increased, in part due to increased pharmacist roles in primary care. Filling temporary gaps is more expensive too; some locum pharmacist earnings doubled between 2020 and 2021. Businesses that cannot fill shifts with locums may even have to close. “Some pharmacies have to shut for the odd half day here and there. Yet when the doors aren’t open, the overheads are still incurred,” Mr Patel says. 

Taking a longer view 

There is an argument – not strictly applicable only to community pharmacy – that the Government’s role is not to think short term. 

Day-to-day cannot be good enough, given the public service community pharmacies deliver and even more so when the Government wants the long-term future to be an accessible, clinically-driven model for community pharmacy. A little short-term help could mean that there will be more pharmacies surviving to make that shift and meet patients’ needs in the community.

To help with cashflow issues, there is a private market for accessing loans. Lenders are still willing to lend to community pharmacies. “Lenders still love pharmacies. They are always going to have NHS income,” explains Mr McPherson. So much so, he says, that there are more lenders interested in the sector now than there have been in the past.

From the perspective of His Majesty’s Treasury (HMT), any case for the Government to step in to help with money management needs more than the argument that times are tough. HMT will also expect that any contractor will have done all they can by themselves to manage cashflow issues. That means not only good business acumen and commercial financing, but also making the most of the available revenue-generating opportunities. 

“The big thing that contractors can do is to offer additional services,” Mr McPherson points out. Pharmacists have a unique selling point too: “People don’t need to make an appointment to see them.”  

Some contractors are taking up financing to enable them to expand services. Shaun Watts, finance director at Christie & Co, explains: “We offer unsecured business loans – we are seeing many operators utilising these funds to expand or redevelop their site to include consultation rooms, with a real drive for the offer of additional services.” Christie & Co has seen an increase in lending to the pharmacy market. “Lending is up from £3 million in 2021 to more than £12m in 2022,” says Mr Watts.

There’s a virtuous circle too; Mr McPherson says those who are making the most of their ability to offer new services are those who are most attractive to lenders. “Lenders will look at the financials and key metrics like the balance of provision of prescriptions and additional services as well as OTCs,” he says. 

Think like HMT

Warm words are cheap, so loosening the Government’s purse strings needs a compelling case. The sector needs to think like HMT to pre-empt its reasons not to provide more help. Asking for government-backed loans is an especially big ask when the private market is still offering financing. 

It’s a more complicated case to make, but arguably a more promising route might be to argue for an approach that targets Government help where it is needed most: such as in locations where no pharmacy can otherwise be sustained. 

That’s harder for the sector, since it means winners and losers, but it might be one that is the best for patients and one they can also get behind. Let’s not forget, they’re also voters. 

Copy Link copy link button

Running Your Business