Financial challenges facing UK Pharmacies in 2025: Navigating funding cuts and rising costs

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The average pharmacy relies on NHS funding for about 90% of its income. The NHS provided a fixed funding package for the five years to 31 March 2024, however, no adjustments to cover inflation have been made, which amounts to a real terms income reduction of about 30%. Since 2017/2018 supply, utility and wage costs have spiralled and regulatory burdens have increased, leaving pharmacies under pressure to manage the cashflow, while struggling to meet patient demand.

Pharmacies in a period of uncertainty

Pharmacies expected to have received details of a new funding deal before now, however, the 2024 General Election caused a delay to any announcement and it is hoped that negotiations will recommence soon. The current pressing issues have been fed back to the Government, ahead of the development of the new 10-year plan for the NHS, but this period of uncertainty could likely last for some time.

Key challenges

Below are some of the key challenges impacting pharmacies and advice on best practices to ensure robust financial health and operational excellence.

1. Funding cuts and reimbursement issues

The reduction in government funding and changes in reimbursement models have put significant financial strain on pharmacies.

Best practice:

• Diversify revenue streams: Explore additional services such as health screenings, vaccinations and private consultations to generate extra income.
• Efficient inventory management: Implement robust inventory management systems to reduce waste and optimise stock levels. Also consider pharmacy floor layouts to provide sufficient consultation rooms and to maximise customer touch points with products. 

2. Rising operational costs

Costs continue to increase for rent, utilities and wages and are squeezing profit margins.

Best practice:

• Cost control measures: Regularly review and negotiate supplier contracts to ensure competitive pricing. Use of complete procure-to-pay purchasing systems. Multi-location inventory management allows pharmacies to monitor stock levels in branches and transfer between locations as necessary.
• Energy efficiency: Invest in energy-efficient equipment and practises to reduce utility bills.

3. Regulatory compliance

Keeping up with the ever-changing regulatory landscape can be time-consuming and costly.

Best practice:

• Stay informed: Subscribe to industry newsletters and participate in professional networks to stay updated on regulatory changes.
• Compliance audits: Conduct regular internal audits to ensure compliance and avoid costly penalties.

4. Technological advancements

The rapid pace of technological change can be daunting and requires significant investment.

Best practice:

• Adopt digital solutions: Implement pharmacy management software to streamline operations and improve customer service. Use finance professional to source cost effective funding for capital and software projects.
• Training and development: Invest in staff training to ensure they are proficient in using new technologies.

5. Workforce Management

Recruiting and retaining skilled staff is becoming increasingly difficult. The increase in employers National Insurance and National Minimum Wage from April 2025 will have a significant increase in staff costs, particularly where part-time staff are used.

Best practice:

• Employee engagement: Foster a positive work environment and offer professional development opportunities to retain staff. Involve staff in identifying bottlenecks and the setting of key performance indicators. Also offer staff incentives to encourage great performance, such as staff bonuses if targets are met. Consider the improvement of salary packages by implementing salary sacrifice schemes.
• Flexible working: Implement flexible working arrangements to attract a broader talent pool and reduce the need for high-cost staff such as locum pharmacists.

6. Management information

Some pharmacies may not have the expertise in-house to ensure they have timely and accurate management information and robust financial forecasts.

Best practice

• Ensure a regular management accounts pack is prepared and most importantly reviewed, with key issues identified and actions taken where necessary. Prepare rolling 12-month integrated cash flow and profit and loss forecasts.  Prepare and monitor 13-week rolling short-term cashflow forecasts. Compare actuals to budget on a monthly/weekly basis and identify reasons for variances. Take prompt action to resolve issues. Outsourcing this finance function may be beneficial if you do not have the resources in-house.

7. Restructuring

A recent Pharmacy Pressures Survey stated that less than half of pharmacies are barely breaking even, and there are indications that nearly one in six may close within the next year.

Best practice

• There may be restrictions to growth that cannot be overcome. This may be the time to consider selling whilst the business still has a value. Alternatively you may be interested in buying one or more pharmacies to achieve economies of scale. Whether buying or selling, the services of an experienced corporate finance professional are essential to assist in valuation and due diligence work to achieve the best sales/purchase terms.

8. Risk of insolvency

The financial pressures from funding cuts, rising costs, and reimbursement issues can push pharmacies towards insolvency, this is a huge issue for some.

Best practice

• Early warning systems: Regular review of actual performance to budget and review of cash flow forecasts will identify cash pinch points and early signs of financial distress. If a funding gap is identified, look to resolve as early as possible.  f support from your lender is required to bridge the gap, involve them at an early stage – leaving it to the last minute is likely to make your lender nervous and make it more difficult for them to assist.
• Debt management: Develop a clear strategy for managing debt, including negotiating with creditors and exploring refinancing options if necessary.
• Contingency planning: Create a plan that outlines steps to take in the event of severe financial difficulties. This plan should include cost-cutting measures, asset liquidation options and potential sources of emergency funding.
• Cash flow management: Maintain a healthy cash flow by managing receivables and payables effectively. Conduct monthly financial reviews to monitor performance and identify areas for improvement.

Navigating challenge

UK pharmacies are navigating a complex landscape marked by funding cuts, rising operational costs, regulatory changes, technological advancements, and workforce challenges.

Considering various aspects, pharmacies can look at ways to improve their position including the introduction and management of cloud-based systems, specialist tax advice (including salary sacrifice schemes and employee ownership for larger groups), sourcing finance to purchase capital and software, restructuring and advice on cost cutting.

Alternatively, you may be considering the sale or purchase of a pharmacy business or need advice about different insolvency processes and the effect on directors/shareholders.