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setting up financial systems

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download a cashbook example

download a cashflow example

all businesses need to control and manage their financial affairs. gp practices are no different as they are classed as small businesses. the role of the practice/finance manager will include dealing with the finances of the practice. they will need to maintain the books and records, which will be used to prepare the financial accounts.

the purpose of accounts is to provide an historic record of the practice’s financial performance. provided that they are prepared promptly after the practice’s year end, they will be a useful tool in making financial decisions.

the accounts are also required so that the gps can declare their profits to the inland revenue. other third parties may also be interested in the accounts such as bank manager and mortgage lenders.

bookkeeping

bookkeeping is the basic recording of the business transactions. these transactions will usually be recorded in the cashbook and petty cash book.

cash book

the purpose of the cashbook is to record all the income and expenditure that passes through the bank account. this should be kept accurately and up to date.

an example of a manual cashbook is shown overleaf. the cashbook is set out in a columnar format. the right hand side of the cashbook is used to record the income and the left hand side records the expenses. in both instances there will be a total column with several columns to the right, which are used to analyse the income or expenses into categories.

the cashbook should be written up each month using the remittance advices, paying in books and cheque stubs. for each income transaction, the details that need to be recorded are the date received, the details of the income, the source, the paying-in number (if applicable) and the amount. each entry of income should then be analysed under the appropriate heading. the amount will therefore be entered twice, once under the total column and once under the analysis column. for each payment transaction, the details that need to be recorded are the date paid, the details of the payee, cheque number and amount. each payment should then be analyised under the appropriate expenses heading. the entries in the cashbook are recorded for each month, at the end of the month the columns should be totalled. the total of the analysed columns should agree to the total of the total column.

for computerised packages, you would still be required to enter the date received/paid, details of income/expenses, cheque number/paying in number, the amount and also what category of income or expenses the transaction should be analysed to.

transactions that are recorded in the cashbook must be supported by documentary evidence (see section on records that need to be kept). this provides a trail so that if you need to check entries in the cashbook, these can easily be traced.

if there are any transactions for which the documentary evidence is inadequate, you will need to make enquires to find out exactly what it is. e.g. receive a remittance advice from the pct with no details. you should contact the pct to find out what the income is for, so that it can be correctly recorded in the cashbook. if it is not queried at the time the income is received, it is likely that your accountant will query it with you, when preparing the end of year accounts.

bank reconciliations

at the end of each month the cashbook should be reconciled to the bank statement to ensure all entries in the bank have been recorded and are accurate.

the reasons why the cashbook balance (see below for explanation of this) and the balance per the bank statement may differ are because of:-

  1. timing differences due to outstanding cheques. there is a delay between the time the cheque is written and recorded in the cashbook and the time the cheque clears the bank account.
  2. timing differences due to outstanding lodgements. this relates to items which have been paid into the bank account but have not yet appeared on the bank statement.
  3. the cashbook not being updated with items which appear directly on the bank statement and which should also appear in the cashbook e.g. direct debits, bank charges.

the bank reconciliation should be prepared to the last day of each month. the stages of preparing the bank reconciliation are as follows:-

  1. rule a line on the bank statement after the last item in the month.
  2. tick off items on the bank statement to items in the cashbook or on the computer, one by one but do not go past the line you have ruled on the statement.
  3. update the cashbook for any items that appear directly on the bank statement which have not yet been recorded. e.g. bank charges, direct debits etc.
  4. prepare the bank reconciliation as shown overleaf. the bank reconciliation is the balance per the bank statement at the end of the month plus any income which is written in the cashbook, but not yet received into the bank, less the outstanding cheques. these are the cheques that have been written and recorded in the cashbook, but which have not yet cleared the bank account. (if using a computer package, it is likely this part of the exercise is done for you as it should list the outstanding items)
  5. prepare the cashbook bank balance as shown overleaf. the cashbook balance is the cashbook book balance at the start of the month plus the total income recorded in the cashbook for the month less the expenses recorded in the cashbook for the month. the cashbook balance represents the money that would be left in the bank account, if all items have cleared the bank. the closing balance should agree to the bank reconciliation, if not, then you have made an error. if using a computer program, you should ensure that the cashbook opening balance on the computer is correct. if you still have an error, you need to re-tick the entries on the bank statement to the cashbook / computer. be careful to ensure that all entries agree to what appears on the bank statement transposition errors are easily made. e.g. you may have entered an amount in the cashbook/computer as £245, but on the statement its £254. this is a common error and if you have made such an error your difference will be exactly divisible by 9, as in this case.

petty cash

most practices will have petty cash which they use to pay for low value items for example milk, stamps etc. the transactions that are in cash should be recorded in a ‘petty cash book’. each transaction should be supported by documentary evidence e.g. receipt or a petty cash voucher.

it is advisable that income received in cash for signing passports, travel vaccinations be kept separately and banked. money should then be drawn from the bank account each month for the petty cash tin. this ensures that all of the cash income is recorded and accounted for.

alternatively, if the practice receives a lot of income in cash, they may prefer to use this cash to pay for cash expenses, instead of going to the bank to draw the cash out. however, it is extremely important that all cash coming in is be recorded and accounted for inland revenue purposes.

petty cash should be reconciled each month to the amount of money left in the petty cash tin as follows:-

money in petty cash tin at start of the month x

add: cash drawn from the bank and/or cash x
income received in private fees into tin (if cash income has been paid into the bank this
can be ignored)

deduct: petty cash expenses per book (x)

balance of cash, this should agree to the amount of x
cash in the petty cash tin.

imprest system
practices may wish to use the ‘imprest system’ for controlling petty cash. this is where a set amount is used as a running balance for each month. at the end of the month a transfer from the bank would be made so that the money in the petty cash tin was the same at the start of the month. e.g.

cash in tin at start of month £ 100
cash expenses £ (60)
balance of cash in tin £ 40
cash drawn from bank for next month £ 60
cash in tin at start of next month £100

therefore whenever you counted the petty cash, the cash plus expense receipts will always equal £100.

control of the petty cash tin should be limited to as few staff as possible and kept under lock and key. this is an area where money can be misappropriated.

 

records that need to be kept

there should be documentary evidence to support all transactions for inland revenue purposes. it is advisable that the following records are kept for maintaining the cashbook.


income

  • a file for income received, which should include all remittance advices to support each income transaction recorded in the cashbook, these should be filed in date order.
  • record of unpaid and paid fees for medical reports. this can be kept in a book, which records the date the invoice is sent, to who and for how much. the book should be updated for the date when the income has been received. this will allow any unpaid invoices to be easily identified and payment chased. the invoices issued can be kept in an unpaid folder, and transferred to the income file once received.
  • old paying in books.

expenses

  • a file for unpaid invoices and paid invoices. once an invoice has been paid it should be transferred to the paid invoices file and filed in order of the date paid.
  • it is advisable that all invoices record the date paid and the cheque number.
  • old cheque stubs.

bank account

  • all bank statements should be kept for each bank account that the practice has.
  • all bank statements relating to mortgages and loans.

petty cash

  • all receipts to support petty cash expenses or petty cash vouchers.

records should be kept for each accounting period. all these records will need to be kept for seven years.


budget setting and the cashflow forecast

it is a useful management tool to prepare a budget and cashflow forecast for the forthcoming year. a budget is a predication of the profitability of the practice. this will take into account all income that is receivable in the year and all expenses that are payable e.g. a practice with a 31st march 2006 year end should include the income for the quality and outcomes achievement in their budget, even though it will not be received until after the year end. this is included as it is income which has been earned in the practice year.

the cashflow is quite different from the budget as it looks as the actual income and outgoings and when physically received or paid into/from the bank account. in the example of a practice with a march year end, their budget for the year would include the qof achievement payment, but the cashflow would only include the monthly aspiration payment. this is because the income would be paid into the bank account after the year end. another difference is that the budget looks at profitability, whereas the cashflow looks at the liquidity of the practice.

how to prepare a budget

the two essential things you need to know when setting a budget is the income and expenses for the practice.

firstly, you need to include all the income the practice expects to receive in the budget. this should be fairly easy to do as a practice would know their list size and how much this would give for the global sum. if receiving the mpig correction factor, again this will be known. pms practices will know what their pms budget is for the next year. the practice should also be able to estimate the expected quality points and the income this will generate. the practice budget should include all other income that is expected to be received. if this is difficult to predict, the best estimate is the figure per the last set of accounts.

next, the practice should estimate the expected expenditure of the practice. as a starting point for setting the budget of expenses, the practice could use the last set of accounts which would show the actual expenses incurred. these could be adjusted for changes which you expect to occur in the forthcoming year, such as employing an additional nurse or redecorating the surgery, the budget for salaries / repairs should include take account of this.

the budgeted cashflow can be compared to the actual income and expenses recorded in the cashbook. this will allow the practice to see if they are under or over the budget. the budget is not set in stone and can be reviewed an amended throughout the year.

the annual budget can then be used to prepare a cashflow forecast.

it is important that the cashflow of a business is managed. it is quite separate from establishing whether a practice is profitable. businesses that go into liquidation do so, not because they are unprofitable, but because they are unable to pay their debts on time. this is normally due to not having enough cash in the bank account to meet these debts.

the cashflow forecast allows practices to identify months where they may need additional funding to ensure that they do not overdraw in the bank account. if this is known in advance they could plan for it. for example, if the cashflow shows that the bank could overdraw in certain months, then they could plan for this by arranging short term borrowings or the partners could take less drawings.

how to prepare a cashflow forecast

the cashflow is based on the budget for the income and expenditure received and paid.
you need to enter all the income in the months that it is expected to be physically received into the bank account. e.g the income for the quality and outcomes is going to be paid as an aspiration payment and then an achievement payment at the end of the year once the actual points achieved are known. the amount of detail needed in your cashflow will vary. all the incomings for each month should be added together so you have a total income for the month.

next, you need to record all the outgoings from the practice bank account. this will include the practice expenses per the budget, the partner’s drawings, tax, repayment on loans and also cost of purchasing any equipment. you should record the outgoings when they will happen e.g. partner’s tax is only paid in january and july. also include the total amount for the outgoing e.g. paying a loan, the budget should only include the interest cost of a loan, but the cashflow will show the monthly payment.

all the outgoings for each month should be added together to give a total for the month.

to calculate the effect on the cashflow for each month, you need to add the incomings to the surplus/deficit brought forward at the start on the month. from this you need to deduct the total outgoings for the month, this will give you the expected surplus/deficit of cash at the end of the month. this amount is then carried forward as the surplus/deficit at the start of the next month.


on the next page is an example of a budget and a simple cashflow forecast for a practice.

download a cashbook example

download a cashflow example