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How Effective Cash Flow Management Can Help Pharma Sustain Profits

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How Effective Cash Flow Management Can Help Pharma Sustain Profits Blog Dont D365 Finance And Ops

Pharmaceutical companies are facing congressional and regulatory pressure to cut costs and lower prices, while also struggling with dwindling innovation models and decreased profitability. They face radical healthcare reforms that affect drug trials, sales, pricing, and manufacturing. Improving cash flow management can ease these pressures and support innovation, leading to sustained profits.

Pharma’s Unique Struggle

Working capital reflects the amount of cash a company has tied up from production costs to when it ultimately receives payment from customers. The pharmaceutical industry has historically had weaker working-capital performance comparative to other industries. This is due to the lengthy and expensive lead time from research and development through testing and regulatory approval to the sale of products. The pharmaceutical industry is a capital intensive, high risk industry characterized by big upfront costs and a lengthy wait to see a financial return, and that assumes that the new product is approved at all.

Finance teams with effective working capital management practices can help ease the strain on pharmaceutical companies caused by declining sales, pricing pressures, and long product lead times. Benefits of accurate cash flow management include:

  • Sustaining innovation and getting products to market
  • Supporting management decisions, such as taking the company public to raise capital
  • Freeing up resources to fund strategic objectives and explore new markets
  • Sustaining profits

How to Optimize Cash Flow Management

Finance teams equipped with the right reporting and analysis tools can further the goal of cost reduction by improving their companies’ accounts payable position with better supplier management and reduced supply chain costs. With easy access to the right data, they can also optimize accounts receivables by monitoring customer invoice aging Extending this to integrated planning enables accurate, effective budgeting and forecasting, which helps improve cash flow management. The following steps can help finance teams enhance cash flow management:

Support Your Supply Chain

Large pharmaceutical companies have extensive supply chains scattered across the globe. Many of their suppliers are small to medium-sized enterprises facing their own working capital and cash flow challenges. Margin improvements can result from collaborating with suppliers to provide early payment programs and strengthen the buyer-supplier relationship. Finance teams need analytic tools to identify which suppliers to target with payment options in order to maximize benefits. Providing cash flow to suppliers in exchange for invoice discounts can result in:

  • Cost savings  
  • Increased earnings before interest, tax, depreciation, and amortization (EBITDA)
  • Higher earnings per share
  • Improvement in overall operating performance

Budgeting and Planning

Pharmaceutical companies are large, complex organizations made up of multiple operating entities, trading in various currencies, and falling across numerous jurisdictions. Gathering data across those entities’ disparate systems and correlating this into effective reports poses a real challenge for finance teams. Yet this is crucial for accurate budgeting and planning.

Finance needs tools to synthesize trends and market movements, anticipate competitive actions, and plan accordingly. This requires effective budgeting and planning tools that make it easy to collect and aggregate local data into an overall plan. The tools need to support integrated planning by enabling each business area to create its own plan, which rolls up into an overarching model. With this level of flexibility, pharmaceutical companies are able to move to a continuous planning process which can help reduce days inventory outstanding and improve working capital.

A/R Management

Receiving payment for goods or services in a timely manner is key to optimizing cash flow management. Managing global payment terms and customer receipts delays is challenging for finance teams, especially when dealing with multiple currencies and jurisdictions. Strategies to ensure accounts receivables month-end goals are realized include negotiated arrangements and invoice discounting for early payment. In order to do this effectively, finance needs real-time access to accurate data and ad hoc reporting to determine which accounts to target for negotiation of payment terms or discounting. The right data analysis tools can give finance more control over their accounts receivables and result in enhanced cash flow for the organization.

Pharmaceutical companies face many challenges, including high capital expenditures, long time spans between research and delivery to market, accurate pricing models, and the ability to handle high levels of debt and profitability. The power to effectively manage cash flow is crucial to success in this industry and can be achieved by finance teams if armed with the right data analysis and reporting tools.  

insightsoftware solutions help finance teams create fast, drillable ad hoc reports and visualizations with real-time data to track and discern trends in inventory, effectively manage the supply chain, and optimize accounts receivable. Finance can simplify the budgeting and planning process with a solution that integrates across all the major ERPs. Find out more by requesting your free demo.  

Technology is accelerating research and development, while simultaneously fueling the digital transformation of the pharmaceutical industry. View this infographic to learn why it’s vital to help your accounting department keep up using finance-owned reporting.