There are several areas that the partners and practice manager need to review carefully when the latest set of annual accounts is available:
- Profit per partner
- Allocation of profits
- Partner profits versus partner drawings
- Practice investment
- Debts and claims
- Future drawings
Is this in line with expectations? Is it increasing or decreasing? How does it compare with other practices’ profit?
Profit per partner
Arguably more important than practice profitability, profit per partner raises some interesting points.
For example, replacing a retired partner with a salaried GP will reduce practice profitability but should increase the profit per partner. If the profit per partner needs to increase and increasing income is difficult, could this be achieved by a partner reducing sessions and the workload being absorbed by other partners?
Allocation of profits
Does the allocation of profits among the partners correctly reflect what has been agreed and is this consistent with the partnership deed?
If partners are being paid extra for additional sessions worked, is the sessional payment set at the right level? A partner should normally be paid more than an external locum for additional sessions worked.
Partner profits versus partner drawings
How do partner profits compare with partner drawings? High-earning partners can run into difficulties if drawings are set at too high a level. There must be a margin between profits and drawings to provide some leeway to manage unforeseen reductions in profits.
It is always painful if partners have to pay money back into the practice.
Are there imbalances between the undrawn balances due to each partner that need to be equalised, either by a one-off payment or by an adjustment to future drawings? Do drawings levels take into account differing circumstances? For example, two partners may have identical profit shares, but if one is paying added years superannuation, monthly drawings will need to be lower to compensate for this.
All practices need investment to function and this will need to be provided by the partners, or by banks or other external funders. Is the need for funds increasing or decreasing? Is the balance right? What will happen to practice profitability if interest rates rise?
Should the practice consider hedging against some of the risk of rates increasing by taking out a fixed-rate loan?
Debts and claims
Are debts being collected promptly for private reports from patients or solicitors? Are all claims for reimbursement from primary care organisations, NHS England, CCGs or local authorities being made in a timely fashion?
The accounts will show the previous year’s figures, but look at earlier years’ accounts to identify trends over four or five years.
For example, what is happening to staff costs as a proportion of income over this period? Is income per patient being maintained? What is happening to the practice list size?
Do not forget that annual accounts show a historic position. Think about changes in income, expenses or partners since the last year-end when making decisions about future drawings.
- Luke Bennett is a partner at accountants Francis Clark LLP, an Association of Independent Specialist Medical Accountants member firm
Other articles in this series:
- What is included in a set of accounts
- The income and expenditure account
- The balance sheet
- Working capital
- Analysis of income and expenditure
- How profit is allocated to the partners
- Making the figures meaningful