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Cash flow forecasting: a vital financial tool

In these times of financial uncertainty, the ability to assess the practice's business risks is essential, says Russell Finn.

Basing forecasts on accounts figures beats crystal ball-gazing (Image: iStock)
Basing forecasts on accounts figures beats crystal ball-gazing (Image: iStock)

Putting together a realistic cash flow forecast allows a practice to predict how their earnings will fluctuate in the future and enables it to identify key risk areas in the event of an unexpected expenses rises or income drop.

Once the practice has a 12-month cash flow forecast, you need to adjust it each month for the actual flow of money in and out of the practice.

You can build your cash flow forecast on a computer spreadsheet. Or there is plenty of business software available that can be used for this.

Start with the last annual accounts

A good place to begin is with the practice’s last set of annual accounts as you can use the figures in the profit and loss account (aka income and expenditure account) under the various income and expenditure headings for predicting future income and expenses over the following 12 months.

It is best to split this into four quarters, to tie into the regular primary care organisation payment cycles.

Look at each of these quarters in turn and note down all the income that you received in the previous year. Do you think that these payments to the practice will recur? Are there any new sources to include? Also consider whether the payment levels have gone up or down and whether this is likely to change.

Reflect income and cost trends

A key factor here is to take into account whether any increased (or reduced) payments are based on list size changes, as this can effect not just the baseline contract payments and QOF income, but also most of the enhanced services payments and earnings for private fees for medical reports.

Next you need to do the same exercise with all the practice’s expenses. Consider increases to the salary bill and inflationary rises in other expenses areas such as energy and telecom bills.

Planned changes

Also, it is important to factor in to the forecast  the impact on practice expenses of major changes you already know will happen: things like more/fewer staff, a salaried GP becoming a partner; locum cover for a partner leaving.

The list of possible changes is endless but, if forecasts are new to you, do not despair  as the practice’s accountant can usually put together a basic projection for you.

The practice should then add the finishing touches to ensure ir it is as accurate as possible.

Once you have prepared your forecast it becomes the practice’s budget for the coming year.

Actual and forecast results

Most financial (bookkeeping) packages allow you to load your the budget into the software so that you can readily compare actual results with the budgeted figures. Alternatively you can use a spreadsheet.

By comparing the achieved results to the budget, it is easy to identify any areas that are underperforming and address them before the practice experiences financial problems.

Money at the bank

The cash flow forecast is more complicated to create (so you may need help). However, as it shows the impact on the practice’s bank account, drawing up one is essential if you need to decide if the practice can afford any kind of investment.

The example forecast here shows the impact of a loan taken out to develop a three-partner practice's premises and making repayments on it.

Identifying business risks

Armed with a cash flow projection you can examine it to find key areas of risk. For instance consider how the practice could cope if:

  • The QOF achievement payment is three months late.
  • An extended hours enhanced service contract is withdrawn?  
  • The PMS contract was replaced with GMS.
  • These are questions that a properly drawn up forecast will help to answer. In the example here, the forecast can be used to predict the number of extra patients the practice would need to add to its list to make the loan repayments.

Lenders' requirements

If the practice is seeking loan finance, potential lenders will expect to see a cash flow forecast (and possibly a balance sheet forecast showing the practice’s capital assets) together with the last annual accounts. 

  • Russell Finn is a specialist medical accountant at Harold Sharp

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