DAVID CLOUGH
FCA
Chairman
Association of Independent Specialist Medical Accountants (aisma)
Partner
Charles Rippin & Turner accountants
David qualified as a chartered accountant in 1968 with Charles Rippin & Turner and has been a partner in that firm since 1970. The firm has specialised in the medical profession since 1948 and acts for many GP practices. David has lectured in taxation and accounting for more than 20 years, has given countless talks to GPs and GP registrars, and has been a regular contributor to various medical magazines. David is a founder member of aisma (the Association of Independent Specialist Medical Accountants) and is currently chairman of this organisation. His interests include music, campanology and real ale
Doctors are not immune to the effects of the current economic situation. Medical practices are businesses, and will be affected by rising costs and restricted income. It has to be said that NHS practices are cushioned to a great extent – income is paid regularly and, provided services are maintained, this provides a good basic reliable income. This applies to both General Medical Services (GMS) and Personal Medical Services (PMS) practices, although the basic calculations do differ.
However, one must not and cannot be complacent, as there are many variable and consequently less reliable sources of NHS income in the form of enhanced services, the Quality and Outcomes Framework (QOF), etc. These sources are becoming an integral part of a surgery’s work and income – the problem is that no work and no claim equal no income. To produce a predictable monthly income from the NHS requires hard work and teamwork from all within the practice.
Non-NHS income is even more unpredictable, especially in the current climate – but as this provides an alternative to NHS income, new sources may be required to maintain the practice income.
The first step to maintaining your profits is to anticipate the future. This is best done by forecasting or preparing a financial budget.
Forecasting/budgeting
It is important that the size of any problem is known, otherwise remediable action is difficult to assess. A forecast or budget for the forthcoming year should be prepared using known information from primary care trust (PCT) statements and past accounts, taking into account anticipated changes to income and expenditure. Take advice from your practice accountant or ask him or her to review your calculations.
To assist with preparing a budget or forecast, let us look at the following aspects of a GP practice:
- Income.
- Expenses.
- Superannuation.
- Taxation.
- Drawings.
- Record keeping.
Income
NHS income overall is not rising and is being reallocated with changes – eg, to the correction factor. Each GMS practice must assess how their global sum would be affected. Similarly, PMS practices must carefully review their baseline calculation to ensure this is in accordance with the contract. Variations will usually follow changes to the list size. Are these alterations correct? Also, attacks on growth monies can seriously damage a practice’s financial health, and a planned resistance to these potential reductions must be discussed well in advance.
Enhanced services are more difficult to forecast, as this source of income is unreliable and volatile. Do you know what services are available, nationally and globally? It is essential to be up-to-date. Constant contact with the PCT and other practice managers is encouraged.
Consequently, some practices will find their NHS income falling over the next few years. Alternative sources of income should be investigated. There are many possibilities outside the NHS but income streams that take GPs away from the surgery must be handled carefully, else costs – eg, locums – could exceed the income generated.
It is also important to check that the practice is being paid for work actually done. Do you check PCT statements and other documents when received? Some sources of income are the subject of claims. Drug reimbursement is often overlooked and you should make sure that you know what can be claimed. Those involved, such as nurses, often do not record the drugs dispensed and consequently a claim is never made, thereby losing the practice money.
List sizes for both GMS and PMS practices play an important part in the pay structure. A reduction in numbers is costly, and patient losses should be investigated. It must be borne in mind that a loss of income does not necessarily mean a fall in expenses.
Enhanced services under the NHS cover many different services. It is necessary to question whether the practice is making use of the doctor’s expertise, as services such as minor surgery can produce a useful source of income.
The Statement of Financial Entitlement (see Resources) sets out the pay structure and is a difficult read. However, its contents are the basis of the practice’s income, and a nominated partner (and practice manager if time allows) should spend time familiarising him/herself on the pay structure and potential claims.
A more readable book is Managing Money for General Practitioners, recently updated and produced by Radcliffe Press (see Resources).
Expenses
Using historical information from the last practice accounts, each category of expense should be reviewed and a forecast prepared, taking into account known price increases and plans to expand or contract a practice.
An analysis of costs from GP accounts shows that labour costs account for the greatest part of surgery expenditure. Ancillary staff and nurses, on average, account for 30% of a practice’s total income. GP assistants and locums are an additional cost but are a variable cost according to the size and set-up of the practice.
Consequently, small variations in labour costs can affect the profitability greatly. It is therefore important to prepare a staff budget – and keep to it. Build in something for temporary staff. Assess the demand for locums. In larger practices, internal locums (ie, partners or existing medical staff) are cheaper and more reliable. It must be remembered that external locums can cost the equivalent of £96,000 per annum on average, although rates vary considerably around the UK.
Correct utilisation of staff is imperative. Use the skills a person has for the right job. Staff must work efficiently to reduce costs. The same principle applies to medical staff. Nurses can often be employed to release a doctor from mundane tasks, and at much lower costs. The right skill mix within any organisation is difficult to achieve. Help from outside the practice might be worthwhile.
Staff training is important and should not be overlooked. This can often develop hidden skills from existing staff who know the practice and its patients.
Capital expenditure on furniture, equipment, surgery extensions, etc must also be taken into account in the forecast. You might find that, owing to the recent reduction in loan costs, borrowing would be a cheaper option to funding the capital costs out of current income or reserves.
It is an ideal time to take the opportunity to review your providers. Gas, electricity and telephone costs have all risen considerably over the past years and time spent on obtaining alternative quotes is often well spent. Time should also be given to other costs, such as stationery, to find cheaper and more competitive sources. Review staff use of practice telephones, as calls to mobiles can be expensive. Some telephone systems incorporate systems to reduce the costs of such calls – does yours?
Superannuation
Superannuation contributions for staff and GP principles are effectively a cost to the practice. Superannuation contributions are becoming a heavy burden for the average practice, and recent changes [see page 28] have increased the employee’s contribution up to a maximum 8.5% (previously 6%) of pensionable pay. The employer’s contribution remains at 14%.
Consequently, for staff the cost to the practice remains unaltered, unless pay levels are increased – but for GP principals the practice will have to find contributions of up to 22.5% of their pensionable pay. PCTs are currently requesting information to prevent large underpayments, but it is difficult to forecast the potential without preparing a budget or forecast.
The practice must be aware of any underpayments that arise from the previous year, as these will have to be incorporated in your budget. The recovery is often taken in April and will reduce the monthly income at that time. If this is not factored in, the practice could have a cash-flow problem.
Taxation
The tax liabilities of the GP principals are, in theory, a personal liability. If, however, the practice funds the tax liabilities, a provision should be made within the forecast and advice from the practice accountant would be necessary. The tax is payable in January and July each year, and it is prudent to keep the tax fund separate from the everyday current account.
Taxation, which includes Class 4 National Insurance, accounts for approximately one-third of the partner’s earnings. It is recommended that partners ensure that all expenses they incur personally are claimed properly. A discussion with their accountant is prudent. Accountants who specialise in doctors’ finances will be able to assist in ensuring that all proper claims are made.
Drawings
The monthly drawings taken by the doctors should be calculated. Remember that they can only take what is left after expenses, tax and superannuation have been paid or provided for.
If a drawings policy has not been discussed and implemented, take advice from your accountant who will be able to recommend a system. The system should prevent a partner becoming overdrawn at the end of the year, and will also produce an equality, which will be welcomed by all concerned.
It should also be remembered that if profits are likely to fall according to the practice budget, drawings will inevitably have to fall too.
Recordkeeping
An important part of financial efficiency is the keeping of reliable records. These are not only required for the accountant but also provide up-to date information to the practice. If the budget is being prepared, comparisons with actual income and expenditure on a regular basis are important to ensure that the practice is on track.
Action to rectify shortfalls in income or overspends ought to be taken as soon as possible. Do not wait until the practice accountant presents his figures three or four months after the year ends. While it is recommended that an accounting system is maintained on computer, this is not absolutely essential provided the system is maintained and kept up-to-date on a regular basis. The book-keeping system should be supported by the following:
- PCT statements should be filed in date order, having been checked with the bank statements, and the income verified.
- Invoices and receipts for expenses to be filed in date order.
- Petty cash expenses should be recorded and backed up with receipts wherever possible. The responsibility for this should rest with a responsible member of staff.
- Bank statements for all practice accounts should be filed in date order. Most banks will supply a folder to contain these statements.
- If a drawings system has been recommended, it is suggested that a summary of the calculations is kept on a monthly basis.
Partners should be encouraged not only to keep proper records of their personal expenses, but also to supply details to their accountant as soon as possible after the end of your financial year. Delays can cost money and cause problems for other partners.
Summary
A short article such as this cannot possibly cover everything, but maximisation of efficiency is necessary in today’s climate. Too often, time is not allocated to preparing and discussing the future of the practice.
A more efficient practice will delegate the overseeing of the practice finances to one of the partners who do, of course, have ultimate responsibility. However, the day-to-day responsibility is given to practice managers who, with support from the nominated partner and practice accountant, play an important and valuable part in ensuring that the practice finances are healthy.
An important issue, often overlooked, is that the future must be discussed and planned by the GP principals. If there isn’t time for this during the week, it is recommended that an away day is planned for a weekend. This could involve all staff and cover not only financial issues but also other aspects of practice life on the clinical and management side. Useful information from staff can assist the efficiency of a practice, and now is the time to prepare for the next financial year.
Resources
Department of Health. GMS Statement of Financial Entitlements (SFE) 2005 onwards. London: DH; 2005. Available from: http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/Publicati…
Gilbert M (ed). Managing Money for General Practitioners. Oxford: Radcliffe Publishing; 2006.
