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
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.
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
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