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Setting up Financial Systems
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a Cashbook Example
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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:-
- 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.
- 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.
- 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:-
- Rule a line on the bank statement after
the last item in the month.
- 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.
- 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.
- 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)
- 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
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