Are you up to date with calculating the correct level of drawings. Here we have several ways to help keep track of the numbers
Drawings are one of the most sensitive issues facing GPs as they represent take home pay and form the basis of personal financial planning. A decrease in drawings can cause much emotional stress and to avoid this, practices must take great care in calculating a consistent level of drawings, to create certainty in the minds of the GP partners.
Contract changes resulting in the potential loss of income together with increased staff costs is a constant source of worry among GPs. Commentators are predicting that many will need to take the drastic measure of reducing drawings. Steps have to be taken to determine whether drawings levels can be maintained or whether a cut will be a necessity. There are a number of clues that can help in the process:
Having dealt with the above, study carefully the partner’s current accounts set out in the latest practice accounts. Let us assume that the partner’s current account for Dr ‘A’ in the accounts for year ended 31 March 2015 was as in Table 1.
It is clear that the profit share is the key to the calculation of drawings. While it is true that if there is profit short falls there will be a reduction in taxation and superannuation contributions paid, timing becomes a significant issue. If profits fall in the year to 31 March 2016 then this will not affect tax paid until 31 July 2016 at the earliest. Superannuation contributions adjustments may not be made until 31 March 2017. This needs to be taken into account when calculating the level of drawings.
Practices should concentrate on profitability as it is this that impacts on drawings. The above doctor would not wish to maintain current drawings if profits are falling as the balance of £7,815 could be easily eroded leaving him or her in debt to the practice. A current account balance needs to be maintained in order to finance the working capital of the practice. Practices therefore need to know what is likely to happen to profitability before making adjustments to drawings.
In the example set out in Table 1 the practice has to forecast profitability in 2015/16 and set a strategy accordingly. A 5% reduction in profits will lead to an immediate reduction in overall drawings of £500 per month for the above doctor. This could fall to about £250 per month when the tax and superannuation reductions are taken into account. Practices have to study every line of income and expenditure to see what can be done.
Some tips that might help during the process are:
A few tips in considering practice expenditure are:
Having undertaken the above, you should be in a position to estimate the practice profits for the year, and the likely profit share of the above doctor. If profits remain static, it is likely that drawings will remain unchanged. If profits are to increase then a conservative increase in drawings may be appropriate. However, remember to retain funds to meet increased taxation and superannuation contributions. If profits are likely to decrease, then drawings must be reduced immediately.
How do you know that the new drawings level is correct? The answer lies in monitoring the bank account and managing the cash flow of the practice. If the bank balance remains fairly consistent the drawings should be in order. A shortage of cash may indicate that drawings are excessive. Conversely, an excess of cash may indicate that drawings are too low.
Calculating the level of drawings is no easy task but it must be performed.
Other issues that need consideration before drawings levels can be finalised may be:
– Salaried GP.
– Other health professional.
– Bank borrowings.
– New partner cash introduced.
The crucial element
Care is required to monitor drawings but it is worthwhile. A partner’s personal finances, the planning thereof, and as a consequence family living standards are wholly dependent on drawings. Errors can lead to both personal and practice disharmony. They can be a major factor behind partnership changes. What is crucial is that the reward for being a partner must always outweigh being a salaried GP or Locum.
Keith Taylor, head of medical services at BW Medical Accountants.