Last week, I met with a practice where these issues came sharply into focus. Cash flow had become a problem after a partner retired and the practice paid their superannuation balancing payments in advance.
These days, PCTs are paying for claims and enhanced services later than ever. One of the consequences is to reduce the available cash flow. This can be made up by borrowing the money or by the partners, the owners, leaving more money in the practice bank account. This practice regards the use of overdrafts as something quite wicked, and so we discussed their options.
This five-partner practice has historically left £10,000 in their partners' current accounts. But the practice bank account is dangerously low, damaged by late payments from their PCT and one partner has retired. So, putting aside the late payment problem, the four remaining partners would each need to have £12,500 to leave the practice in the same position as five partners with £10,000. But the practice needs more cash flow, so we agreed that each partner would leave £15,000 in their partners' current accounts.
This is not happy news. The partners were expecting to take some money out of the practice not introduce money. Furthermore, this is money they have already paid tax on - remember tax is payable on profits, not what is taken out of the practice.
What made the situation worse in the short term was the payment for the partners superannuation. Unlike practice expenses, superannuation is only allowable against tax in the tax year it is paid. The PCT had been lazy at collecting the practices superannuation and they had built up a large balance of superannuation owed to the PCT.
This balance will be paid at some point, but to ensure they got the tax relief in 2010/11 they sent a cheque to the PCT for the superannuation in March 2011. This hits the bank account immediately, but reduces the tax payments in January 2012.
The effect of all this is to make the practice manager's job very difficult. A leaving partner has been paid out, the superannuation is paid, fewer partners need to support the finances of the practice, and the PCT are taking longer to pay the practice. Whatever happened to the 'advances' that PCTs used to pay practices?
So, after some anxiety ridden discussions, the idea of a practice overdraft does not seem quite so awful.