Yonas had a good month, by most measures. His pharmacy in Hawassa sold more than it had in any month the previous year, the shelves were full, and customers were coming in steadily from morning until closing. Then, on the last Tuesday of the month, he could not pay his supplier. The invoice was due, the amount was modest, and the medicines had arrived on time. But the cash in his account had been tied up in stock that had not yet sold, in insurance payments that had not yet cleared, and in a few accounts with regular customers who paid when they could. He called the supplier, apologised, and asked for a short extension. The supplier agreed, but the conversation left him with a cold feeling. He was profitable on paper and short of money in practice.

Yonas's problem is one that many pharmacy owners in Ethiopia will recognise. Profit and cash are not the same thing. A pharmacy can sell well and still struggle to pay its bills, because money leaves the business at one point in the cycle and arrives at another, often weeks later. Managing that gap is what working capital management is about. It is less glamorous than sales or pricing, but for many pharmacies it decides whether the business survives a slow patch.

What working capital actually is

Working capital is the money a business needs to run its day-to-day operations. In a pharmacy, it is largely the difference between what you have tied up in short-term assets, such as stock on the shelves and money owed to you by customers, and what you owe in short-term liabilities, such as supplier invoices and wages due soon.

The key idea is timing. You buy medicines before you sell them. You may sell them before you are paid. You pay staff and rent on fixed dates, whatever happens to your sales. Each of those timing differences has to be funded from somewhere, and if the funding runs out, the business stalls even when its margins are sound.

Think of it as a cycle. Cash goes out to buy stock. Stock sits on the shelf for a while. A customer buys it, and either pays immediately or owes you money. Eventually the cash comes back in. The shorter that cycle, and the less cash it ties up along the way, the healthier your working capital position.

Map your cash cycle

Before trying to fix anything, understand how long your cash takes to travel around the cycle. Three numbers are useful. The first is how long stock sits before it sells, which you can estimate by dividing the value of your average stock by your daily cost of goods sold. The second is how long customers take to pay you, which matters most for insurance claims, corporate accounts, and anyone who buys on credit. The third is how long you have before you must pay suppliers.

Yonas worked these out over a weekend with his sales records and his supplier statements. He found that his stock was sitting for almost seven weeks on average, with a few slow lines holding far more cash than they justified. His insurance receivables took around ten weeks to clear. His supplier terms gave him only thirty days. The gap between paying out and getting paid back was the real source of his problem, and it was much larger than he had realised.

Once you can see the gap, you can work on it. You can reduce how long stock sits, shorten how long customers take to pay, or negotiate longer terms with suppliers. Most owners find they can make progress on all three, but the right order depends on where the cash is actually stuck.

Reduce cash tied up in stock

Stock is usually the largest use of working capital in a pharmacy, and it is often where the easiest gains are. Holding more stock than you sell creates two problems. It consumes cash that could be used elsewhere, and it increases the risk of expiry and write-off. Holding too little creates the opposite problem, lost sales and unhappy customers.

Start by identifying slow-moving lines. Sort your range by how quickly each product sells, and look at the bottom fifth. Ask whether each one earns its place, and whether you are holding more of it than customers will buy in a reasonable period. Reduce standing orders for those products and consider reducing the number of units you buy at once.

Review reorder levels for your fast-moving products too. Set minimums based on actual sales patterns and lead times, not on what feels comfortable. A product that arrives in three days and sells steadily does not need six weeks of cover. Build in a sensible safety margin for the items that would cause real harm if they ran out, and keep it modest for everything else.

Be careful with bulk purchasing offers. A supplier may offer a lower unit price for a larger order, and that can look attractive. But if the extra stock ties up cash for months, the saving may be smaller than the cost of the money you have locked away. Compare the discount with the true cost of holding the stock, including the risk of expiry.

Speed up customer payments

Customers who pay late or not at all are a common cause of cash shortages. For a walk-in cash customer, payment is immediate. For insurance claims, corporate accounts, and regular customers who buy on credit, the gap can be long and unpredictable.

Set clear terms and communicate them. If you offer credit, decide who qualifies, how much credit they can have, and when payment is due. Write the terms down and give a copy to each account holder. Vague arrangements produce vague payments.

Invoice promptly and accurately. A bill that is delayed or contains errors gives the customer a reason to delay payment. Send statements regularly, and follow up on overdue balances early rather than letting them grow.

For insurance claims, keep documentation complete and submit claims as soon as the paperwork allows. Track the status of each claim and chase delays. Ask your insurance partners what their processing times are and whether they can be shortened by submitting information in a particular format.

Offer convenient payment methods. Mobile money, card payments, and bank transfers make it easier for customers to pay on time. Check that your system records each payment correctly, so that you can see exactly what is owed.

Be realistic about bad debt. Some customers will not pay, and the sooner you recognise that, the less cash you lose waiting. Decide in advance when an account will be suspended or referred for collection, and apply the rule consistently. Fairness and firmness can go together.

Negotiate supplier terms with care

Longer payment terms from suppliers effectively give you an interest-free loan, which can be a valuable source of working capital. But terms are only useful if the relationship is sound. Pushing a supplier to extend payment, then paying late, usually ends badly.

Start by understanding what your supplier needs. Some want reliable, predictable orders more than they want fast payment. Others need cash flow of their own. Offer what you can: regular ordering patterns, prompt confirmation of deliveries, and clear communication when something goes wrong. In return, ask for terms that match your own cash cycle.

Be honest about your position. If you need more time, say so early, rather than waiting until a payment is already overdue. Suppliers are more willing to help a customer who warns them in advance than one who disappears and then surfaces with an apology. Put any agreed extension in writing, including the new due date and any conditions.

Do not rely on suppliers to solve a structural cash problem. If your business consistently needs longer terms than a supplier can offer, the problem is usually the cash cycle, not the supplier.

Build a cash buffer

Even a well-managed pharmacy will face slow weeks, unexpected bills, and supply disruptions. A cash buffer is the safety margin that lets you absorb those shocks without missing payments or taking expensive emergency credit.

Set a target. A common rule of thumb is to hold enough cash to cover several weeks of fixed costs, such as rent, wages, and utilities, plus the next supplier payment. The exact figure depends on your business, but the principle is to avoid running down to zero. Build the buffer gradually, perhaps by setting aside a fixed share of profit each month, and protect it from being spent on non-essential items.

Monitor cash weekly, not just monthly. A simple cash forecast for the next four to eight weeks, showing expected receipts and payments, will warn you of a shortfall well before it arrives. Update it regularly, and compare the forecast with what actually happens to improve its accuracy over time.

Be careful with short-term credit

When cash runs short, the temptation is to borrow quickly, often at high cost. Short-term credit can bridge a genuine gap, but it can also become a trap if it is used to cover structural losses. Before taking on any short-term facility, be clear about the cost, the repayment schedule, and what will change to ensure the gap does not reappear.

Think about whether the problem is temporary or structural. A one-off delay in an insurance payment is a different situation from a stock position that keeps growing faster than sales. Short-term borrowing suits the first. The second needs a change in how you buy, price, or collect.

Where you do need outside finance, approach it with the same discipline you would use for any loan. Know exactly what you need it for, how it will be repaid, and what would happen if sales were lower than expected. For more on the lending side, the principles set out in other guidance on financing a pharmacy apply here too, so check the terms carefully before signing.

Supply that supports your cash plan

Working capital management depends on predictable supply. If deliveries arrive late, you may need to hold extra stock as insurance, which ties up cash. If prices rise unexpectedly, your cash cycle lengthens because the same stock now costs more. Reliable, documented suppliers help you plan purchases with confidence and avoid both shortages and excess.

Look at your supplier relationships through a cash lens. Which suppliers deliver on time and in full? Which give clear pricing and reasonable notice of changes? Which offer terms that fit your business? Consolidating purchases with fewer, more reliable suppliers can simplify planning, though it is wise to keep a backup for essential lines.

If you are looking for exporters who understand Ethiopian import requirements and can offer steady, documented supply on predictable terms, you can review the options at pharma exporter to Ethiopia. Verify product registration, certification, and documentation before committing, and check current import rules with the relevant authorities.

What Yonas changed

Yonas did not transform his business overnight. He reduced standing orders on his slowest lines, cut two products from his range that had been sitting on the shelf for months, and set reorder levels for his fast movers based on actual lead times. He wrote clear credit terms for his regular accounts and began sending statements every two weeks. He spoke to his main supplier, explained his cycle, and agreed a thirty-five day payment term in writing.

Three months later, the cash balance had stopped swinging wildly from week to week. He could see the next month's payments coming and plan for them. The supplier call he dreaded has not happened again. Yonas says the biggest change was not any single decision, but the habit of looking at cash every week and asking where it was going to be in six weeks' time.

Practical wisdom for owners

Profit tells you whether your business is worth running. Working capital tells you whether it can keep running. Map your cash cycle, reduce the stock that sits idle, collect what you are owed promptly, negotiate supplier terms honestly, and keep a buffer that protects you from the unexpected. Forecast cash regularly, and be cautious with short-term borrowing. A pharmacy that manages its cash this way does not need a good month to stay solvent. It is solvent because it has planned for the gaps between buying medicines and being paid for them.