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Contingency funds and cash-flow planning

All practices should have a contingency fund for times when unexpected expenditure or other unforeseen events causes a cash-flow crisis, says Dr John Couch

Most practices have at least once had the nasty experience of discovering unexpectedly tight cash-flow. The only thing to do when this happens is to reduce partners' drawings at short notice – to howls of anguish. It is pointless explaining that actually drawings had been too high – a pay cut is still a pay cut.

Interestingly, when the opposite occurs and an extra distribution can be made, there are smiles all round. The fact that previous drawings could have been higher is not even considered among the joy of a windfall.

This is a perfect illustration that the practice of cash-flow requires both accountancy and psychology skills. As it is often very difficult to get drawings just right, the incorporation of a contingency fund into your cash- flow planning can act as a useful buffer to soak up any inevitable but unexpected large one-off increases in expenditure or falls in income. There are many examples of these such as:

• Unexpected equipment replacement (for example, ECG machine, defibrillator or spirometer)

• Unexpected building repairs

• Expenditure omissions in cash-flow planning (such as flu vaccine)

• New opportunities or projects

• Delayed or disputed PCT payments

Your contingency fund should strike a sensible balance between over-caution and recklessness. There are several approaches that you could adopt. You could look at your previous three years of accounts and list items of expenditure greater than £1,000 that were unexpected, calculating an annual average.

Another approach is to allow for one major replacement, one major repair, one large expenditure omission and one unexpected project per annum. However the simplest approach is to set the contingency at between 1-1.5 per cent of the previous year's turnover.

Apply this figure from the start of your financial year. It can be funded either by reducing monthly drawings equally across the year, or from your QOF balancing payment in April/May. The latter will reduce any distribution to partners at this time but allow drawings to be kept higher.

Stay meticulous

Be careful to avoid over-reliance on the contingency by being as meticulous as always with your cash-flow planning

Keep a separate spreadsheet to show how the contingency is spent as the year unfolds, whether it is on expenses, to shore up drawings, or when PCT payments are lower than expected. This record will also be very useful to fine-tune contingencies in future years.

The balance of the contingency fund must be carried forward each month on your cash-flow spreadsheet. As well as acting as a buffer to ensure that your current account stays well in the black, you could also transfer some of the excess into a linked savings account whenever possible to ensure you earn some interest.

At the end of the financial year you could carry over any remainder as a 'debtor' to help fund next year's contingency. But it may be more sensible to distribute the balance among the partners and then start afresh for the new financial year. This would certainly be smart psychology by keeping smiles on your colleagues' faces. Gordon Brown would be proud of you.

John Couch is a GP in Ashford, Middlesex

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