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Managing practice cash flow

Faye Armstrong has advice on ensuring your practice always has ample funds on hand to pay creditors and staff on time.

Unusual, one off, or unanticipated demands on cash flow can catch practices out
Unusual, one off, or unanticipated demands on cash flow can catch practices out

Practice cash flow should be reasonably predictable, and peaks and troughs can be planned for and managed. But there are always unusual, one off, or unanticipated demands on cash flow that catch practices out.

Cash flow is generally at its between February and May, when the January tax and NHS superannuation balancing payments have been paid, but the QOF achievement payment has not yet come in. However, difficulties can happen at any time of the year.

What can cause cashflow problems?

Tax bills often cause the biggest cash flow problems.  The end of January payment can easily catch practices out, especially when a new partner has been appointed.  

For instance, if a salaried GP becomes a partner on 1 April 2012, their first tax bill will be due on 31 January 2014, and will be the tax on a full year’s profits, plus half as much again. This can put a serious dent in cash flow. Straightforward increases in practice profits can cause similar problems because the tax on the increase in profits is paid well after the profit has been earned.

Retiring or departing partners 
A partner’s current/capital account balance (their investment in the practice) can amount to a substantial sum, and often has to be paid to them within six months of their departure. Even if a new partner joins to replace the retiree, they may buy in to the practice over time, leaving the practice to fund the retiring partner’s pay out in the meantime.   

Superannuation over and underpayments
Overpayments of NHS superannuation may be repaid to the practice many months after they are made, tying up valuable cash. Underpayments of superannuation are paid in one lump sum when the GP principals’ annual superannuation certificates are submitted, making a large dent in cash flow.

Changing income streams
Reform of primary care organisations and in England, the implementation of CCGs may create new income streams, but there is no guarantee that they will have the same prompt and regular payment cycle offered under the current contract.

Before taking on new work always check when payment will be received for it and what costs will have to be met in advance of those payments coming in. The effect of this is illustrated by the example of a practice (in England) switching from one directed enhanced service to another: dropping extended hours and taking on patient participation will mean moving from an income stream which is paid monthly to one which is paid annually in arrears, and cash flow will suffer.

Failing to plan for loan repayments
Making capital repayments on a new or existing loan will place demands on cash flow.  If the repayments are unmanageable, consider whether to refinance and lengthen the time over which the capital is repaid, though this may mean additional arrangement fees and an increase in the interest rate.

Unexpected claw backs of income
It is easy to be caught out by claw backs that come out of the blue. However, having a good handle on whether you are meeting the eligibility conditions for your contracts and income streams will allow you to identify any potential claw backs and put funds aside to pay them.

What can be done to prevent cashflow problems?

Planning is key. Well-prepared projections of monthly cash flow for 12 months ahead will show when cash flow is likely to be tight,  and when monies owed to the practice must be chased, supplier payment terms taken advantage of, and an appropriate overdraft facility arranged.

Setting a cautious drawings policy for partners and revisiting it at least once a year can help manage cash flow peaks and troughs. It is vital that the policy is based on realistic projections.

Partners can create a financial buffer by under-drawing - leaving some profits in the practice, or accept that they will have to reintroduce funds if cash flow gets difficult and no other solution can be found.

The main spikes in cash flow can be planned for. Tax bills should not come as a surprise.  For example, a practice with a 31 March 2012 year end should have its accounts prepared this summer and will have an accurate estimate of the January 2013 and July 2013 tax bills by autumn.

Partner retirements and changes can also be planned for. As well as thinking about practical and clinical issues, consider how the payout will be funded, when the new partner will pay in, and approach the bank at the earliest opportunity if additional funding will be needed.

Managing cash flow takes time and effort, but 'cash is king' for all businesses, and that includes medical practices.

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