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Impact of the new GMS contract on a practices working capital

A practice needs sufficient cash to pay for all its day to day activities. Under the new GMS contract the way that a practice's income will be paid is going to change and they will need to consider the impact this will have on their working capital.

Working capital of the practice

The cash a practice has available to pay for its expenses is known as working capital. The working capital of a practice is calculated as its current assets less its current liabilities. Current assets include stock of drugs, debtors and cash, which is money that a practice is owed from third parties. Current liabilities include creditors, which is money that the practice owes to third parties.

Under the old GMS contract practices income from fees and allowances is calculated quarterly. Practices receive a monthly advance for two months prior to the quarter end and then once relevant claims have been submitted and the actual fees for the quarter calculated the practice would receive the balance. Practices may have needed to have more working capital for the two months prior to the quarter end to ensure that there was enough cash to pay expenses for those months.

Under the new contract the global sum and the MPIG correction factor will be paid monthly. As the income of the practice is spread evenly over the year then practices may be able to reduce their working capital requirements.

The quality and outcomes framework is going to be paid in two stages. Practices will receive an aspiration payment, which will be a third of the value of expected quality points in the first year. This income will be paid evenly over twelve months. Once the practice achieves the points then the other two thirds of income will be paid as a lump sum in April. Although the quality and outcomes money is supposed to be additional income this may have an effect on the working capital.

As practices are only going to receive a third of the quality income in the first year, the more points they aspire to achieve the more income they will receive as an aspiration payment. Practices are free to aim as high as they wish as long as they can demonstrate a reasonable chance of achievement to their PCO.

Practices will also receive outstanding items of service income under the old red book in June and September 2004, which will help towards the cashflow of the practice.

Cashflow Forecasts

Practices will need to consider the new payment arrangements and how this will affect their cashflow. If a practice has calculated an estimate of their likely income under the new contract they could use this to prepare a cashflow forecast to see the effect that this will have on their working capital. A cashflow forecast shows every source of income and expense that is likely to pass through the bank account (including partners drawings and taxation) for each month, this is normally prepared for a twelve month period. There may be certain months where more working capital is required i.e. when the partners' tax is due in January and July.

Working capital and partners' current accounts

The partners' current account balances show their share of money they have left in the practice. The total of the current accounts will be equal to the amount of working capital and the value of the fixed assets that the practice has. As the partners are taxed on their share of profits and not drawings taken from the practice, there is no benefit to the partners for leaving excessive amounts of working capital in the practice if it is not required.

If too much working capital has been withdrawn from the practice then this will be indicated by the partners' current accounts being overdrawn. The consequences of the partners overdrawing could mean that the practice may have to use an overdraft in order to meet day to day expenses. An overdraft can be an expensive way to fund working capital.

Overdrawn current accounts means that the partners have taken more drawings than their share of profits. If the practice has claimed tax relief on loan or overdraft interest then the Inland Revenue could disallow some of the interest as the Revenue could argue that this is financing the partners additional drawings.

Increase in partners' tax

The new contract is going to increase investment in general practice by 33% and as a result most practices could see an increase in their profits. If practice profits increase this will mean an increase in the amount of tax that will be paid by the partners. If the profits that are taxed in the year 2004/05 increase, then there will be a large balancing payment due in January 2006. Practices and GPs will need to ensure that enough money is put aside for future tax liabilities.