Q: Since last April the practice’s current account has been almost permanently overdrawn. Most ways of reducing expenditure seem to be staff-related and necessary to provide an efficient
service. Overdraft charges seem horrendous. Is there a cheaper way to finance the practice’s working capital requirements?
Q: Since last April the practice’s current account has been almost permanently overdrawn. Most ways of reducing expenditure seem to be staff-related and necessary to provide an efficient
service. Overdraft charges seem horrendous. Is there a cheaper way to finance the practice’s working capital requirements?
A: GPs’ profits have been falling recently and our PKF analysis of our GP clients’ profits for 2010/11 showed a reduction in the average profit per full-time equivalent partner from £151,549 in 2009/10 to £147,496 in 2010/11.
This is the total profit including non-NHS income but the same trend is shown in the Department of Health figures for average superannuable profits where the final average was £92,955 in 2008/09 but the interim average for 2011/12 has fallen back to £93,972 after having risen to £95,802.
Profit projections
As with all businesses in the present economic climate, it is particularly important to prepare a realistic profit projection. In undertaking this exercise, you can review with your accountant opportunities for maximising the practice income and controlling expenditure. The pay award is mainly going to be delivered through the quality payments with the value per point increasing from £130.51 in 2011/12 to £133.76 in 2012/13, so the focus on increasing NHS income is going to be around maximising patient numbers and efficient coding to maximise the practice’s disease prevalence factor.
Drawings calculations
GPs’ disposable profits have been hit by the increased tax rates in 2010/11 and 2011/12 and will be further affected by the impact of increased employee superannuation contribution rates from 1 April when they are on the whole increasing by 2.4% with a top rate of 10.9% for superannuable profits over £110,274.
If drawings are not reviewed to take account of the forecast profit level, the increased superannuation contribution rates and, if tax is provided for in the practice, the impact of the tapered personal allowance and the increased NIC rates, then the practice cash-flow can easily be tipped into overdraft. A positive effect of preparing the profit forecast and drawings calculation is that it focuses partners’ minds on the need to take steps to maximise profits and for the practice manager to chase the primary care trust (PCT) for any late payments. There has been a noticeable increase in debtors in GP practices over the last couple of years with delays in payments for enhanced services and even registrars’ salary refunds, and with some PCTs reducing seniority payments to band 2 for GPs whose superannuable profits are clearly in the band 1 level. This can put practices into unexpected and in some cases unauthorised overdrafts that are very costly.
Funding working capital
All businesses have a working capital requirement, which is just the level of capital required to keep the business running smoothly. In a GP partnership, capital is required to fund the purchase of equipment and furniture and fittings, and the stock of drugs as the drugs are only reimbursed when used.
In addition, the debtors have to be funded, as while the practice is awaiting the receipt of the cash it needs to have sufficient funds to pay the staff, but that funding can be partly offset by the creditors where the practice owes money to suppliers but payment may not be due for a few weeks. This working capital can either be funded by the partners’ capital accounts or by the practice having either a loan for practice capital or an overdraft. Most non-dispensing GP practices have a fairly low capital requirement so the cheapest way to fund this is from partners’ capital accounts, with the capital being provided in accordance with the partners’ profit shares.
However, if an expensive piece of equipment is being purchased, then a loan may be more appropriate, although the loan period should be for no longer than the expected useful life of the equipment. Where there is just a short-term cash requirement then an agreed overdraft facility is generally the best option. You do therefore need advice on your practice’s individual situation to find the cheapest and most appropriate solution for you.
Valerie Martin-Long is a partner and National Director
of Healthcare Services at PKF, Chartered Accountants
and Business Advisers, and can be contacted
on 01483 564646 or [email protected]