Over the last few years Ferrier Hodgson has been engaged by a number of financiers and pharmacists to conduct business reviews, provide business health checks and make recommendations on the options available to them, when their relationship is no longer in the “honeymoon phase”.
Our analysis of the factors contributing to these breakdowns and the lessons learnt from each engagement indicate that, despite these businesses being very different from each other in terms of structure, performance, size, etc, there are often common factors that bring the relationship to the breaking point:
- Lack of communication is usually the number one factor. Most of the time the need for an independent advisor arises when the parties no longer talk to each other or trust each other. The key is to continue to communicate with your financier, in good and in bad times. If it’s good news, make sure you let your bank know. If it’s bad, don’t let them hear the news from somebody else. Bring it to their attention and present an action plan which may or may not involve their assistance. Invest in a good MIS capable of generating timely and accurate reports about your business and ensure you comply with your reporting convents – these days they are as important for the banks as the monetary covenants.
- Poor cash management – not having proper cashflow forecasts to monitor the cash needs of your business during these times of great change, and then placing “unexpected” funding requests with your financiers, is sure to raise concern. Our experience tells us that most pharmacists understand sales and scripts but don’t understand cashflow. This is becoming critical as prescription margins are getting smaller under increased pressure from the PBS reform. Attend a basic financial modelling course, employ specialist skills or tap into the knowledge and the skills that may already exist in your current workforce. Make sure you know what your cash needs are and understand how current changes within the sector impact on your cash flow, not just in the short term but also in the medium to long term. Know what lies ahead and prepare in order to avoid unpleasant surprises.
- Declining performance – there was a time when being just a pharmacist, focused solely on prescriptions, was sufficient to generate healthy gross margins of up to 40% and keep all stakeholders happy. The world has changed. If performance continues to decline, financiers will see their investment at risk and seek ways to exit the relationship. Develop or employ good retail skills and shift the focus to front shop. Understand how staff turnover, overhead structure and stock management influence your performance and find the mix that works best for your business.
Notwithstanding the perceived risk of the industry these days is higher than what it was few years ago, financiers know pharmacy is still a good industry to invest in and they will continue to seek your business. Maintain a good working relationship with your financier based on trust and credibility and you are half way to having a successful business.
I am a Senior Manager at Ferrier Hodgson, a leading corporate advisory, forensics, corporate recovery and management consulting firm, where for the past 5 years I have been focussing my industry specialization in Retail Pharmacy. During this time I have reviewed a large number of Pharmacies and have a great understanding of issues facing store owners and the industry generally.