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Impact of the new GMS contract
on a practices working capital
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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.
January 2004
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