Five things to ask about your end-of-year accounts
Accountant David Martin
Completing end-of-year accounts is a task that not many practices look forward to, but with proper scrutiny they can provide a wealth of information about the health, sustainability and vulnerability of the business.
Now is a good time to speak to your accountant. Most practice accounting years ended on 31 March and they will be starting to work through accounts now. It should be about far more than just a profit and loss column or the need to record the split between NHS and non-NHS income. With proper analysis, your end-of-year accounts can reveal warning signs for the future or highlight areas of the business which need attention. They can also provide information, of course, on areas of the practice which are working well.
Any doctor hoping to join a practice will also want to see the accounts and may look for the tell-tale signs described there. They can tell a lot about the sustainability of the business – and that is priceless information.
Here are five things to consider about your annual accounts to check whether your practice is running as smoothly and profitably as possible:
1. How strong is the cashflow?
If drawings are greater than your profit share it’s a sign that the long term sustainability of the practice is in question.
This sounds simple and something which should be obvious. But it’s not impossible for it to be missed – drawings often remain steady over many years and it may seem as if everything is on course. But profits go up and down far more frequently. This can result in a sustainability problem and it’s something your accountant should quickly pick up on.
Under these circumstances partners should make careful forecasts and modify drawings if appropriate (which is never popular) or seek out other ways of raising additional revenue.
We all know that reducing costs in a practice is never easy. Bringing in extra cash, by injecting new capital into the business or finding new revenue strands, is often a better option. Simple things such as renting out spare rooms (to a physiotherapist for instance) can be the solution. Chasing the NHS for swifter payment should also be part of the process of helping improve cash flow.
2. Do you know your cashflow for the next 12 months?
Big items of expenditure planned for the next financial year should be a consideration now, not later. Can they be funded from normal cashflow? Even if they can, will this cause problems down the line? Practices should be thinking about a cashflow forecast for the next 12 months. This is absolutely vital.
Keeping an eye on net current assets is also important. If this figure is negative it may be indicative of an on-going concern issue which in turn questions the viability of the practice. In this instance, partners should meet up and analyse the forecast together with their accountant, putting into place tactics to inject revenue into the practice.
3. Are you overreliant on locums?
A lot of practices are having trouble attracting new GPs and are therefore relying on expensive locums. How does the number of patients compare to the number of locums? Maybe it’s actually better to have fewer patients and rely on your own doctors than to constantly chase patient numbers. If the practice is too reliant on expensive locums, it may be time to put a stop to new patient registrations for the time being and make a stronger effort to recruit new GPs. Could the package the practice offers to new recruits be improved?
4. Are partners’ account balances equal?
It is always a good idea to review and compare partners’ current account balances. The balance needs to be positive for each partner and in an ideal world the practice should try and equalise the current account balances held by each partner otherwise there can be issues in future, particularly at times of partner change and succession. Practices should try and avoid becoming overly dependant for funding from a partner who has a large current account balance.
5. Have you taken into account the premises?
If the practice owns the building it will be a fixed asset in the balance sheet and thus can make the balance sheet bigger and stronger than one where the premises are rented.
But that’s not to say rented property doesn’t have its positives, especially as many are rented from the NHS which provides similar stability.
For practices which rent, some consideration should be made as to what happens when the lease ends. Will the landlord ask for dilapidation costs or for the premises to be returned in its original state? This may well cost a lot of money – removing temporary internal walls for instance. Any likely dilapidations costs should all be recorded in the accounts as a provisions. Frequently this is not done.
David Martin is a partner at accountants Knill James and heads the firm’s medical sector team