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Guide to practice accounts: The partners' working capital

GP partners need to keep money in their practice to fund its day-to-day activities. This working capital is shown as 'net current assets' in the accounts. By Barry Rigby.

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Net current assets
Net current assets are the difference between current assets and current liabilities and are shown in the balance sheet. Net current assets indicate whether the practice is solvent – that is, able to meet its financial obligations as they fall due.

Current assets
These are the assets of the practice that can be converted into cash (liquidated) in a short period of time – normally in less than a year. Such assets may include drugs stock in hand, debtors (money owed to the practice) and prepayments, cash and bank balances.

Current liabilities
Conversely, current liabilities are those falling due within one year. They might include trade creditors, PAYE payments, partners’ superannuation payments and, if paid by the practice, partners’ self-assessment tax payments.

Liquidity ratio
Net current assets can be expressed in various ways, including a simple figure or a ratio. The ratio of current assets to current liabilities is often called the liquidity ratio.

Ideally, the figure for net current assets should be positive, or the ratio greater than one. A negative figure, or a ratio less than one, can suggest that steps may need to be taken to ensure funds are available to meet forthcoming liabilities on time.

Accounting years ending in March
Practices with a March accounting year-end may have a relatively high figure for their net current assets due to the QOF achievement payment earned but not yet paid to them. In making any increases in partners’ drawings, it is important to be aware of the position and to avoid the creation of a shortfall at a later time.

Lenders will look at a variety of factors in connection with any application for finance. This will include the net current assets position, which gives an indication of the practice’s ability to meet any additional loan repayments.

Buying fixed assets
In the above context, conventional wisdom holds that the purchase of fixed assets, such as property or equipment, should be financed mainly through partners’ money invested in the practice or longer-term borrowing arrangements that spread the repayments over a period of time.

Substantial payments for fixed assets (diagnostic equipment, fixtures and fittings, for example) from the practice’s bank business account, and therefore from the net current assets, could leave the practice with a future working capital shortfall.

Cash and bank balances
Just as net current assets are part of a balance sheet, it could be argued that the most important element of net current assets is cash and bank balances, because these represent money which is readily available to pay any liabilities as they fall due.

With this in mind, it is important to plan income and expenditure using a cash flow forecast. This is fairly simple to create using spreadsheet software. It will enable the practice to plan cash flow and provide for any larger receipts or payments, particularly if the practice pays the partners’ self-assessment tax liabilities.

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