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The brave new world brought in by the new contract provides an opportunity to review and maximise monthly partner payments Dr John Couch has some practical advice
Drawings are a topic dear to all principals' hearts. The brave new world of nGMS, QOF and enhanced services is an opportunity to review and maximise monthly partner payments while still maintaining the fine balance between business efficiency and withdrawal of profits.
Erring on the side of caution
Prior to PMS and nGMS, NHS income streams were less smooth. Monthly drawings had to be set to allow for the uncertainties of the quarterly payments system, when it was difficult to predict good and bad months. Therefore, in order to ensure running costs were met without a costly bank overdraft, drawings usually erred on the side of caution.
In a good year this would mean that several months after the year-end, partners' current account balances (the amount of extra profit for allocation to each partner) could finally be realised. In a year of good profits this would amount to several thousands of pounds per partner.
Most partners would rather have taken that money sooner. After all, the interest earned on say £5,000 amounts to £250 a year. Most practices also relied on their accountants to set drawings for a given year for which a fee would be charged.
What has changed?
There have been two major changes in recent years. The first is that PMS and nGMS both provide much smoother and, more importantly, predictable income flows. Core income and global sums are set at the beginning of the year and divided by 12. Cash-flow is further improved by the timing of payments to mid-month rather than month-end.
QOF aspiration payments are also set in advance and paid monthly mid-month. Enhanced services are paid quarterly, mid-month, but are much more predictable than old GMS.
The second change is that most practices now use a cash-flow forecast spreadsheet to monitor and predict income, expenditure and bank balance for a whole financial year. This has allowed practices to enter a new dimension of financial management and includes the option of a more proactive approach to partners' drawings.
Setting up your drawings
As always drawings are based on profit shares. A review of drawings should also prompt a similar review of sharing ratios. The following questions should be considered:
·What items of income should be prior shares?
·Should non-clinical activities be included in calculating workload?
·Do current ratios fairly represent current time/work input?
·Do you need a points system for calculating each partners' sharing ratio?
Once partnership and prior shares have been agreed, a separate spreadsheet needs to be constructed that will calculate individual monthly drawings. The drawings spreadsheet must take into account partnership and prior shares, superannuation and added years in order to produce each partner's figure.
The whole spreadsheet must be driven by a singe cell containing a 'profit forecast'. Subsequently the bottom-line figures can then be easily recalculated during the year as dictated by the cash-flow forecast (CFF), changes of partner or sharing ratios.
The profit forecast is an important key to accuracy. Here your accountants can help, provided you have provided them with all relevant information regarding not just NHS but also private income and expenditure. Previous year profits are a good starting point, with adjustments made for known increases or decreases in income/ expenditure.
For instance QOF aspiration payments are considerably higher this year and enhanced service income is likely to rise as more practices take these up.
At this stage it is wise to exclude the QOF balancing figure for 2005/6. On the downside, there has been little or no extra money for staff pay increases. All of these must be taken into account.
Once you have produced provisional drawings figures these can be entered in your CFF. The key monitoring figures here are the predicted end-of-month and end-of-year balances.
You should set a safe minimum level for these high enough to avoid becoming overdrawn but not so high that unnecessary surplus is building up.
As a (very) rough guide, allow £6,000 per full-time equivalent partner, but this will vary, especially if you have a high salaried GP/partner ratio.
Once again you may want to ask your accountants' advice.
It is vital to ensure your CFF is accurate both in setting up and also month-to-month use. If figures for particular items change from forecast, then amend the whole spreadsheet as soon as you are sure the change is going to be recurring. Take care with seniority and GP superannuation as these figures are more prone to errors.
As long as the CFF is accurate you can now use this to make changes to drawings. If the figures you have entered for drawings produce a consistent month-end and year-end surplus, that is an amount over the minimum end-of-month balance set above, you can increase drawings.
Of course the reverse is true if month-end balances are forecast to be too low! Be careful to carry over the new final balance to the next-year CFF to ensure the change in drawings is sustainable.
If you have monthly partnership CFF reviews, it is possible to make quick in-year drawings changes. You can also perform 'what if' scenarios by entering various profit figures until the balance between drawings and end-of-month balances seems comfortable.
Increases to drawings for four-partner practice
Current profit figure for drawings £400,000
Predicted end-of-year cash-flow forecast balance £46,000
Agreed minimum safe level of balance £24,000
New profit figure £422,000
Increases drawings per partner by £5,500 (£458 per partner)