Introduction:
One of my clients questioned me that everything is perfect in Pharma. Everyone needs material on time, good quality products, a complete process, goes through in a systematic way. Everything is completely systematic, completely perfect in a way.
But whenever we talk about payment or we ask for payment from a client, we demand payment from our customer, then it seems as if we have stepped on the tail of a lion and it runs up to eat us.
Everything is perfect, but whenever it comes to payment, then why it becomes imperfect. There is asymmetry in this. That perfection does not remain in it.
So I thought about it a lot, did a little research and tried to understand the whole pattern of why this is happening. If we look at the end level and talk about the patient, mostly the money goes out of the pocket of the patient (actual consumer) but whenever it reaches the raw material supplier, reaches the last of the chain then it seems to be disturbed, then the payment goes on delaying, delaying, delaying, so why does this happen?
Part 1: You Are a Business
There are some factors
It is not necessary that this happens because of only one factor. If you are a business. If your business is running continuously then there are other factors.
If you have a new business, then you have to invest money there first, then there are chances of your payment being delayed there. It works in a different way.
But when you have a business going on, a circle is moving in a routine and your goods are also being sold. You don’t have to keep more stock in the market. Your stock is also available in the market. Everything is completely perfect but still the payment does not come properly.
So to understand that here, we have to understand the entire process of how the pharmaceutical industry works.
Part 2: How the Pharmaceutical Industry Works?
The pharmaceutical industry operates from a raw material supplier to a chemist. The chemist then supplies the medicine to the end user i.e. the patient.
Mostly in all the big hospitals or if we talk about small hospitals, then there the patients pay their full money whenever they are discharged or take their medicine from there. We can say in some interiors or if we talk about small practitioners, there are chances that patient take medicines at credit and don’t pay on the spot to practitioner or chemist. So you can assume payment delay at the end of actual consumer (patient) there that create payment disturbance at the end user level.
If there is a disturbance due to the end user, then this is reasonable to have disturbance in the entire chain, but in most of the cases, the end user pays his entire money, then disturbance does not arise from there. This payment collection disturbance begins from part of chain afterward.
So if we try to understand how the pharmaceutical industry works – First of all, the raw material manufacturer. Who can also takes its chemical material from a chemical supplier, but here we are assuming the raw material supplier is first part of the primary chain, whether it is manufacturing, whether it is trader.
Raw material supplier gives to a pharmaceutical manufacturing company. Credit term is very common at this level. Generally 90 to 120 days credit term remains here.
The manufacturer supplies to the marketing company, whether at contract manufacturing basis or loan licensing or manufacturer may have its own marketing setup, then manufacturer sells to its cnf, distributor or to wholesaler.
So there it works like that whether the manufacturer sold to marketing company or sold to cnf. Then what will the marketing company do? It will give medicines to its cnf or directly to the distributor or wholesaler, so, this chain works like this.
Company whether appoints distributor/wholesaler, it depends on how big the company’s size is. According to that, distributor can directly supply to the wholesaler or directly supply to the hospital or provide its medicines to the chemist.
The chemist then dispense the medicines to the patient against the doctor’s prescription. Or in case of OTC medicines, can directly dispense to the patient without prescription, so, basically the circle of pharmaceuticals, the distribution channel, works in this way.
Part 3: Where is the payment stuck?
So what happens if the end user gives his full money, then we are assuming that the first condition is first, the first scene is that why the payment keeps getting delayed, then here patient is giving his full money to chemist or hospital. So now that the patient has given it, money has gone out of pocket of the customer.
Chemist is a business, wholesaler is a business, marketing company, cnf is a business, manufacturer is business and raw material supplier is business. Here we are now in B2B.
As soon as money went from end user to chemist, we have come here in B2B. So what will happen in B2B, as soon as the money received by the chemist, in most of cases, we will keep some part from that money. We took some money out of what we earned and after that chemist made some payment to the wholesaler.
Then the wholesaler also kept some of that money with it, wholesaler paid the rest to the distributor or to its CNF. So, like this, some money is getting out of distribution chain.
It is fine as long as you are withdrawing only as much as your margin or as much as you need. If you are extracting only like that, then this system continues to run well.
But what happens is that in mostly cases, whether it is a chemist or a wholesaler, distributor, marketing company or we talk about a manufacturing company, they try to extract a major share from that money, not only just extracting their share.
Part 4: Payment Trap Calculation
So if we suppose that we received ₹ 100 from an end user. Now the retailer’s margin is 20%, it is worth ₹ 20. We will take roughly, it is not a matter of calculation that someone may say that here if we mines is 20% then it will be that. We are going with roughly calculations. If ₹ 100 came from the patient, out of that we assumed the chemist had a margin of ₹ 20. So, chemist was to pay ₹ 80 to the wholesaler there.
If we give that ₹ 80 to the wholesaler, then the entire balance is cleared here. Now out of 80, we assume that wholesaler had to keep ₹8 with itself. The rest was to be given to the company or to CNF. ₹72 were to come to the company there.
So 72 rupees, if he is giving 72 rupees to the company, keeping his ₹ 8, then the circle is running fine there. Similarly a chain goes on, if we are only keeping our margin.
But where does the problem come that the chemist was to pay ₹ 80 to the wholesaler but he/she felt that there is some time for payment due, he/she doesn’t need to pay to the wholesaler yet. So, what does chemist do? Instead of giving 80 from ₹ 100 what he/she gets from customer. Instead of keeping ₹ 20 with him/her, he/she will either invest it elsewhere or his/her expenses are so high, so instead of ₹ 20, he withdraws ₹ 30 or more there.
He/she feels that in the next payment what he/she will receive again, he/she will not take his share from it and he/she will give the entire amount to the wholesaler. But it is theoretically correct that you have taken more now and next time you will withdraw less, then that payment will be adjusted there. But when it comes to practical matters, many problems arise.
You withdraw more money there, you gave less to the wholesaler or distributor. So what will happen in this chain that the payment reached to the next party was less. So, the next one will also do the same and will not give full payment what he/she had to pay after deducting own margin.
What will he/she do? He/she will have same feeling that just now is not the time to pay. Now suppose he/she got ₹ 70 from chemist, he/she withdraw his/her ₹ 8 margin there and pays ₹ 62, still there is a difference of ₹ 10, but by not doing so, he/she tries to withdraw ₹ 20 directly from there. So, manufacturer or CNF will only get ₹ 50.
Because distributor will also feel the same because theoretically he/she has also calculated the same thing that when the next payment will be received or season will come or whatever ABC, he/she will adjust from that and so, he takes out more. Like that the payment reduction will be continue and the end vendor i.e. raw material supplier will get very little. Except he/she is not working totally at advance payment. If raw material supplier is providing material only against advance payment to the manufacturer then it’s different thing.
Part 5: Effect of payment delay
So the payment gets reduced a little while reaching to end destination, so the circle goes on like this. Then what happens? The raw material supplier will start to pressurize the manufacturer because his/her previous payment is pending and manufacturer are asking for further material because the demand is coming from the market, the goods are being sold but the payment is pending. The payment circle is broken.
So in such a way that raw material supplier will pressurize the manufacturer. The manufacturer will pressurize his CNF or the marketing company, further these will pressurize its distributor, distributor will pressurize the retailer. Ultimately whole distribution circle may have to come back totally on the advance payment term or have to provide material with limitation.
The amount of payment that is pending, is pending, further as much as he/she is giving the payment, accordingly supplies the goods.
This is a major reason. A major portion of money from process is getting extracted, a lot of payments are coming out. If it continues with normal routine, regularly everyone withdraws only their margin then whole chain will not have any problem regarding payment.
But when you try to withdraw more than your margin at any level. This is not only at the retailer level, if the retailer has given the full amount, then the distributor or wholesaler may start thinking that there is still time for paying bills. I have some work. I could purchase property. I could invest in the share market. I could invest anywhere.
So, this extra payment that are coming out from the business as compare to that what a person should withdraw. When we withdraw more payment, then the payment issue arises. We make ourself satisfy, we convince ourself that what we are doing is right. We are not doing anything wrong.
We are giving business to the next person, so they should not pressurize us for payment. Because we have invested that payment somewhere else. Have Invested or spent, ABC. There could be any reason, our expenses could be so high or we are investing it anywhere, then we do not have money with ourself.
We come under psychological pressure there, when someone asks for payment from us. So then all of a sudden, some people may tolerate it but some feels that the vendor has insulted us by asking payment from us. So, we get angry and sometimes we reply aggressively something or sometimes we don’t even reply.
Sometimes we think that we should stop business with that person, that business, that company now. They pressurize too much for payment.
So, I felt this is the major reason because if the end user is making our actual payment. And that payment does not reach till to the last part of the chain, then the biggest reason for that is that excessive payment is making out at every level.
Part 6: Business Failure
Withdrawal is not a bad thing, but payment withdrawal in access is not good. I have seen many businesses that get destroyed because of this. Sometimes what happens is that if you are withdrawing ₹ 30 out of ₹100, you should withdraw ₹ 20, then that is reasonable.
But sometimes, someone in the chain takes out the entire money. Means if the distributor has received ₹ 70 from the chemist, then he/she takes out 70 out of 70 and invests it somewhere else and he/she thinks that after some time when the payment routine will be ok, then he/she will start making payment properly. But that payment get blocked sometime for a very long period. When it gets stuck somewhere for long time, vendor stops providing material to them and as soon as it stops getting material, their business starts to suffer there.
He/she gets shortage of stock. As soon as he/she will not be able to give further stock in market or unable to supply further, his/her prior investment in the market will also be blocked. Because markets move in a circle. Wherever you leave it, wherever you stop the supply of goods, whatever payment you have invested in the market, it gets blocked there itself.
Part 7: Correcting
Your business a little bit from there… You may think that you will rectify it. If you make one or two mistakes in the starting, after that you rectify these then your business may remain stable, but if you do it for a long time, then your business starts deteriorating there.
So you have to walk very carefully here.
Part 8: Save your Business
Look you can control only yourself. If someone tells me that my friend ‘it’s not in my hand to control chemist, distributor or the company’. They are extracting excess money, what can I do? How can I save my business?
If I speak about myself – I have seen this a lot. Many people haven’t paid my payments in starting but I survived from these. That bad debts means the payment which did not received from market, I had to compensate it. I have to make that payment to the vendor also as well.
For compensating this you have to limit your expenses there. I had to work very tightly to control that. And secondly – I learned from market that you should never give too much credit to any single customer.
There should be a limit for each of your customers that how much credit you can give to that customer. Limit could be based upon his/her sale. If you think that you can give three months credit to a customer and your capacity is to give three months credit to him/her.
It’s also depend at your capacity that how much you can invest in the market, how much capability you have and can maintain. So that your vendor can give you the goods on regular basis and you can also pay him/her easily.
So, if you set a limit there. There are chances, people will not repay money on time. You will get loss due to bad debt but the chances of your business closure because of others, will be limited here.
Part 9: Setting Boundaries
So if you go with a limit that you have to give credit for three months or two months to someone. If he/she is purchasing of ₹ 10000 or ₹ 20000, then you can fix a limit of 40 or 50 thousand there.
You don’t have to give more than this at any condition, whether there is chance of bitterness in relationship. You should clearly refuse to give more credit, saying that you can’t invest more money at you. You do not need to speak wrongly to anyone. Simply you can say, I do not have the capacity to give more credit. I am not in position to invest more and I can’t.
If I talk about myself here, then I work by fixing a limit for most of my clients. After that I assume that I don’t have to give more credit than this. If they deposit payment, as much payment they give or if payment is coming regularly, then I can supply the goods. If sale is increasing then accordingly credit limit will up, if sale is decreasing then credit limit will down.
So, you should consider some factors here. So I don’t give more goods than that. I believe that the amount of money I have invested there, even if it does not come, my business will not be ruined there. I assume it as bad debt in case of many parties. Now I have invested that money on that client whether it was a mistake or right thing.
Now even if they don’t pay, If I assume that this payment will not come from the market, but further I will give only as much goods as much payment I will receive from them and if customer is working on regular basis. expand his/her work, and do his/her payment routine good. After that then you can also increase the credit limit.
Part 10: Economic Prudence
So this is the major reason why the payment is stuck in the market? When you start withdrawing payment in excess from your business. You withdraw more than what you have to withdraw from your profit, for your expenses, then payment problem starts coming.
And this is a one of the main reason for the closure of many businesses, so you have to be very careful manage yourself financially. Because you are not alone in business. Many persons are associated with you also in business.
If my business gets suffered here, then I will not be the single person to suffer in business but many persons, many businesses who depend on me will suffer along with me. So you need to do your business very carefully. You should have a credit limit for each customer.
Because they will take out money from business. May be you only withdraw your profit but they will take out more. So, because of their financial mistakes your business shouldn’t be suffered, so, you should make a limit.
Part 11: Other Reasons
So this seems to be a major reason, apart from this, there are many other reasons due to which payment could be blocked in market. ABC, Sometimes, like in corona, what happened is that the stock that was manufactured get dumped and payment got stuck there.
So there are many other reasons too but these are very unexpected and exceptional reasons. There is a proverb,” If time is not good then a dog can bites even you are sitting on a camel.” So, there are many factors, but the major reason I feel is for the tight payment flow in the pharmaceutical industry or in any other industry is withdrawing of more payment from distribution channel instead of maintaining that flow.
Part 12: Conclusion
Hope this will help you to learn what you can do to keep your business financially stable and you should never try to withdraw money from your business more than your limits, more than your capacity.
It may be that you do not feel it harmful in short term, but in the long term, your credibility will damage and your business will not able to remain stable and your expansion will also become difficult when you need to raise a lot of money from the market.
When you think that you must need money from the market to grow but then you can’t get that. There are many things that will harm you if you do not pay the vendor’s money on time.
Maintenance of cash flow in Pharma or in any business is very important for that business and for that sector.
I hope you like this information, thanks for reading…