Calculating a non-principals profit share

Under the new contract practices can include in their partnership, if they wish, other healthcare professionals such as nurses and non-clinical NHS staff such as practice managers. The only requirement is that practices must have one general medical practitioner. (Para 7.8)

One of our clients raised a query regarding how the partnership could share profits if they decide to take on their practice manager as a partner under the new contract. The practice manager has been employed within the practice for more than ten years. The practice normally rewards her for her contribution to the practice by paying her a bonus once the financial accounts have been prepared. The bonus depends on how well the practice has done financially and the increase in practice profits.

The practice sees her admission to the partnership as a good opportunity to continue to reward their manager for her contribution to the practice. As the practice manager will receive a share of profits she will benefit if the practices profits increase and therefore this will be an incentive to ensure income is being maximised and expenses controlled.

The practice normally calculates their profit sharing ratios based on the number of sessions worked by each GP. Now that the practice manager will be joining the partnership they are unsure of the best way to share profits.

Fixed Profit Share

The practice manager could be given a fixed share of profits with the balance of profits divided by the other partners in their existing profit sharing ratios. The fixed profit share could be agreed each year.

The practice manager is currently receiving a gross salary of £26,000 and has recently received a bonus of £3,000. The practice profits are about £280,000 and Drs A, C and D receive 28% of the profits giving them a profit share of £78,400 and Dr B receives 16% giving a profit share of £44,800.

If the practice decided to give the practice manager a fixed profit share of £35,000 the revised profits shares would be as follows:-

Profits 280,000
Add Manager's salary, bonus & er's NI, no longer paid 31,500
Revised profits 311,500

Profit Allocation
Dr A Dr B Dr C Dr D Manager Total
Fixed Salary 35,000 35,000
Balance
28:16:28:28 77,420 44,240 77,420 77,420 - 276,500
77,420 44,240 77,420 77,420 35,000 311,500

Percentage share of profits

The practice could pay her a percentage share of the profits, so she would receive the benefit of any increase in profits. To calculate the profit sharing ratios the practice could use the profits above as a guideline to how much the practice manager should receive. If this is calculated as a percentage of the total profits the practice manager could receive 11.2% of the profits (35000/311500). If the profits in the next year were £350,000 then the manager would receive a share of £39,200. If the practice manager's earnings were being linked to profits this would be an incentive for her to ensure profits are being maximised.

Another issue raised by the client was whether the practice manager should buy into the working capital and the surgery premises, which is normally required for partners joining this practice.

The partners in the practice felt that it was not necessary for the practice manager to buy into the working capital or practice premises. The reason for her becoming a partner was so that her salary could be directly linked to profits. She would benefit from any increase in profits which was normally down to her ensuring income was claimed and received, targets being met. The partners also agreed that they did not require her to leave any capital within the practice and she could take all her profit share as drawings.

If the practice decided to pay her a fixed share of profits then this share could be paid in equal monthly drawings, so at the end of the year the manager had drawn all her profits. The partners would prefer to give the manager a percentage share of profits. The only issue they have is that they will need to leave capital in the practice whereas the manager will not be required to. It was suggested to compensate the GP partners that they could be paid interest on their current account balances. The interest would be prior allocated and the balance of profits divided in the profit sharing ratios.

The practice manager's superannuation would be calculated in the same way as the GPs. It was also pointed out that as the practice manager's superannuation is treated as being part of her drawings, then her monthly drawings needs to be adjusted for this deduction. If the manager is going to withdraw all her profit share then her monthly drawings plus superannuation should equal her share of profits.