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Writing a budget for your practice

In the first of three financial housekeeping articles, Rosemary Smith explains why budget forecasting is essential and how to tackle it

By Rosemary Smith

In the first of three financial housekeeping articles, Rosemary Smith explains why budget forecasting is essential and how to tackle it

If you were setting out for a walk in an area you did not know you would make sure you had made preparations – that you had looked at a map and calculated a route, checked the weather forecast and worn the right clothing. So why do so many practices start off into a new financial year without having any idea on what position they will be at the end of it? Whether they will need overdraft facilities, what their drawings will be in the coming year, whether there is sufficient cash for an increase for the staff...

Here are some guidelines.

When do I prepare my budget?

Start as soon as you feel confident to do so, before the end of your financial year.

Why do I need a budget?

A reasonable budget allows you to do what you want. It allows you to use your resources where they're most needed, so your practice can head in the right direction. Your budget should be a guide, not a constraint. Creating a budget lets you control your practice's cash flow instead of it controlling you.

Who should prepare the budget?

Usually it will be prepared by the person who keeps your books, as they have knowledge of your income and expenditure and what is likely to happen next year. However, it is important that one of your GPs has a part in the process as they are likely to have a better knowledge of what is happening to your income and what plans are scheduled for the practice.

Your accountant can prepare the budget but they will need to have spoken in depth with you about your plans.

What information do I need?

A budget doesn't have to be a complicated or time-consuming task. Actually, in the beginning, it's best to keep things simple. The key is to determine how much you'll spend and earn in any given year and then use those figures to project forward and ensure there will be no nasty surprises along the way.

It's simply a matter of going through your records to see where the money went last year, as this is one of the best guides as to where your expenditure is likely to go this year. The pattern of expenditure will be similar each year. For instance, your drug expenditure is always higher in November because this is the month when most surgeries pay for their flu vaccines.

To get started, answer the following:

• How much can you realistically earn next year? Do you know the effect of the square rooting changes on your QOF payments?

• How much are your costs likely to be?

• How much are your operating expenses – the cost of running the surgery, whether you see one patient or thousands?

• Do you need new staff? If so, how many? And how much will you pay them?

• How much will you draw for yourself?

• How much tax are the doctors liable to pay if paid through the surgery? Even if it is paid personally, will the doctors need extra drawings in January and July to pay them?

• Will you have underpaid or overpaid your superannuation and what will the effect be of this on your March payment to your primary care organisation?

The answers to these questions will form the basis of your budget and forecast. Answering these questions will help you determine two essential things — your projected income and your expenses.

How do I record my budget?

Most accountancy packages have a budget facility, so if you have not used it before, have a look and you will be surprised how easy they are to use. But if you are having difficulties ask your accountant for help.

Alternatively you will find a simple spreadsheet is just as effective. Show the months across the top and then list your items of income and expenditure down the left-hand side (see example above). Use last year's figures and adjust them for inflation. Then review for changes peculiar to your specific time period, such as capital expenditure for specific projects.

Spend time checking your staff costs, because these will be your most significant expenditure. Are your staff numbers the same as last year? Do you need to account for increments as well as pay rises? Is anyone doing different hours this year?

Put a line in to total your income and expenditure and then at the bottom of the first month show your opening bank balance. If you have not reached this point, calculate what you expect it to be. The final row will be your closing bank balance, which equals your opening balance plus your income less your expenditure. Then closing balance from the first month becomes your opening balance in the second month, and carry on like this until the end of the year.

Once you see your projected income and expenses on paper, you'll know exactly how much you need to make every month to keep things afloat and how much you will have left over for extra expenses. It will be far less tempting to spend money on business expenses that aren't part of your plan. And that's really what a budget is for – to ensure your expenses aren't more than your income. It's as simple as that.

Now I have prepared the figures, is that it?

No, this is the beginning. First look at your closing balances. Are there any months that are overdrawn? If so, can you take the pressure off by pushing some expenditure backwards? Be careful not to do this and miss some discount. Also look at the drawings and see if you can even them out to take the pressure off. If you can't do this, go to your bank manger early with your budget and arrange an overdraft to get you by. It is cheaper to borrow money this way rather than later on.

Also, keep reviewing your budget by comparing it with your actual expenditure. Look at how these changes will affect cash flow over the remaining year. You might only be over your monthly budget by £5,000 but in a year that can amount to £60,000. See why it has happened and make sure changes take effect immediately to stop the knock-on effect.

Rosemary Smith is senior manager at specialist medical accountant Whittingham Ridell

Essential financial skills for general practice - Thursday 24 September Manchester

Sample Budget Spreadsheet Sample Budget Spreadsheet

Sample Budget Spreadsheet

Calculating a budget forecast illustration

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