Five steps to take before cutting your drawings (1 CPD hour)
Accountant Deborah Wood has some advice for GPs on how to keep practice accounts in the black
Many GP partners worry about the potential loss of income from the global lump sum, QOF and enhanced services, with commentators predicting that many will need to take the drastic measure of cutting their drawings.
How do you determine whether this is a necessary option? Start by considering the following questions:
- Is the bank balance deteriorating to the extent that overdraft facilities may be required when previously this was not necessary?
- Is the monthly salary bill increasing at a significant rate?
- Are there any signs of increasing delays in the payment for enhanced services and other income streams?
- Is there any scope to delay the payment of invoices for practice overheads?
- Is there a large capital expense coming up?
- Are you expecting potential clawbacks of practice income such as seniority?
- Will funds be needed to pay out a retiring partner?
Also remember that an individual partner’s drawings can be increased, for example after a 24-hour retirement when employer’s and employee’s superannuation contributions are no longer payable.
The following five steps prepare partners to cut drawings in the way that most suits the practice’s own financial situation.
1 Study the partners’ current accounts set out in the latest set of practice accounts
The fictional accounts of Upside Medical Practice for the year ended 31 March 2013 serve as a good example:
Partners’ current accounts at 31 March 2013
|Dr A||Dr B||Dr C||Dr D||Dr E||TOTAL|
|At 1 April 2012||7,032||6,934||7,245||7,271||7,183||35,665|
|Profit for the year||118,933||127,839||126,106||124,929||124,274||622,081|
|Class 2 NIC||130||130||130||130||130||650|
|At 31 March 2013||7,932||7,316||7,374||7,750||7,815||38,187|
The partners are aware that each year they need to allow between £30,000 and £40,000 to finance the day-to-day working capital requirements of the practice (represented by the total figure on the top line of £35,665 at 1 April 2012).
They also know that 2013/14 will see a further rise in employee superannuation contributions, although if profits fall the impact may not be too great.
2 Analyse what will happen to profits in 2013/14 and beyond
Study every line of the most recent profit and loss account, and forecast what is likely to happen in the year to 31 March 2014, starting with income. Be conservative when estimating QOF points to be achieved and enhanced services to be performed. Think laterally, using these tips to help the process:
- Have we the skills to provide services that may be more lucrative than QOF points or enhanced services?
- Can we get involved in ‘providing’ either by ourselves or in collaboration with other practices?
-Are we performing work that should be delegated to other members of the staff team?
- Can we create time to supplement our income with outside work?
- What different opportunities might there be to generate new income streams in our locality and with our skills and resources?
When forecasting profits, you must also consider recent contract and other changes. The main issues are:
- the phasing out of the correction factor (MPIG) over seven years
- QOF changes such as the increase to the upper thresholds for indicators, the reform of the Contractor Population Index, the reduction of total points to 900 and the shifting of points to new clinical areas
- the GMS uplift of 1.32%
- the new enhanced services in the areas of rotavirus, shingles, seasonal flu, MMR catch-up, risk profiling, dementia cash funding, online patient access and remote cash monitoring
- other changes such as responsibility of locum employer pension contributions, rebate of £2,000 employer’s NI contributions, and increase in GP employee superannuation contributions.
Looking forward, there are other issues that could affect drawings down the years. In particular, the following three issues may be relevant.
- If a partner retirement is looming in the short term, the other partners need to consider whether the replacement will be a partner, salaried GP, or other health professional. A new partner may preserve the status quo whereby the outgoing partner is paid out effectively by the incoming partner. Additional profit may be achieved by recruiting a salaried GP, but the cash received from the excess profit may have to be used to pay out the retiring partner’s share, rather than immediately becoming available to take as drawings by other partners. Consider using a bank loan instead.
- If the practice has a mortgage connected to the surgery premises, review when interest rates might change and what might be the effect on the monthly repayment. When is the loan facility due for review? Will further capital have to be repaid in the short term? How will this be financed other than by reducing the sums of money available for drawings?
- Whilst overall list sizes in the UK are not significantly changing, it is worth reviewing the practice demography to see what effect it might have on future global sums, QOF and enhanced services.
3 Review all practice expenses
Starting with staff costs, remember that in the year ended 30 September 2012 there was a 10% increase in staff numbers in UK general practice. Consider the staff mix. Look at training needs and work together as a team. Letting people go prematurely means that you could find that you do not have the capacity to deal with the expected workload or new profitable income streams.
The most obvious costs to consider are stationery (in particular, computer paper), telephone invoices, insurances, locum costs, subscriptions and repairs/maintenance.
Consider service and expertise, and be especially careful with professional fees, for example for legal and accountancy services. Price decisions alone can easily lead to a false economy.
When reviewing practice overheads remember that you might only get one opportunity to make cuts. At the same time you could consider joining a buying consortium for drugs and other medical supplies. Many practices are now considering outsourcing various management costs but care should be taken as such services no longer become unique to your practice and you may be better off continuing to go it alone. If the practice can become a ‘provider’ of certain medical services then the formation of federations with other practices may prove to be beneficial in terms of the sharing of costs.
4 Reconstruct the partners’ current accounts
Having followed the advice above, now it’s time to reconstruct the partners’ current accounts for the year ended 31 March 2014 to determine what the impact will be on monthly drawings.
The fictional partners at Upside Medical Practice calculate that in the coming year practice profits will fall by approximately 5% to £590,000. They took some equalization drawings in April 2013 and know that employee superannuation contributions have already gone up. They also know they need to allow £35,000 to finance the working capital of the practice. The balancing figure has to be taken from the monthly drawings.
Working with the practice accountant, they reconstruct the partners’ current accounts as follows:
Partners’ current accounts at 31 March 2014
|Dr A||Dr B||Dr C||Dr D||Dr E||TOTAL|
|At 1 April 2013||7,932||7,316||7,374||7,750||7,815||38,187|
|Profit for the year||112,517||121,422||119,690||118,513||117,858||590,000|
|Class 2 NIC||130||130||130||130||130||650|
|At 31 March 2014||7,000||7,000||7,000||7,000||7,000||35,000|
The monthly drawings of each partner will be cut as follows:
A further downside may relate to the payment of income tax. Remember that the income tax payments for the year ended 31 March 2013 occur in January 2013, July 2013 and January 2014. Initially these will be based on profits from the previous year to 31 March 2012 so that the reduction in profit leading to reduced drawings will not have an immediate taxation effect. It follows that a reduction in profits in the year to 31 March 2014 will not have a tax payment effect until 31 January 2015. If the practice saves for income tax on behalf of the partners, the above needs to be taken into account when calculating drawings levels.
5 Backdate cuts to drawings appropriately
When should the cut to drawings take place? The answer is now and the cuts should be backdated to 1 April 2013 by using simple arithmetic.
Don’t forget to review the position regularly. GP partners will want to know if the cut is too conservative or indeed too drastic. The answer lies in the monitoring of the bank account (or control of cashflow). If the bank balance remains fairly consistent or static the cut is about right. If the bank balance shows signs of a downward trend then the cuts are not sufficient. If the bank balance shows an upward trend then the cuts may be too drastic and the GPs can have a one-off special draw later in the year.
Above all, consider where you can save time to create the opportunity for earning non-contractual income.
Deborah Wood leads the Healthcare Services team at Moore and Smalley LLP, a member of the Association of Independent Specialist Medical Accountants (AISMA).