As we begin another financial year, GP practices continue to face financial pressures, including rising employer National Insurance costs. While increases to the global sum have been announced, full details remain uncertain. Now more than ever, it is essential for practices to closely monitor monthly drawings and their overall cash flow position.
Unlike a salary, drawings are variable and depend on the practice’s financial position and each partner’s share of profits. These payments must be carefully managed to maintain financial stability.
Why Reviewing Drawings is Essential
- Avoiding Overpayments – If a partner withdraws more than their entitled profit share, this can create financial strain on the practice and lead to cashflow issues. This may also create imbalances between the partners’ current accounts.
- Ensuring Fair Profit Distribution – Profit shares fluctuate due to changing partner commitments. Regular reviews help ensure drawings remain in line with profit shares or any additional work undertaken.
- Changing Costs – Some costs, such as locum insurance and professional subscriptions, are allocated to individual partners. As these costs change, drawings should be adjusted accordingly. This is also relevant for superannuation payments, where partners may opt out of the scheme.
- Maintaining Cash Flow Stability – Well-managed drawings reduce the risk of cash flow pressures, ensuring the practice can meet ongoing financial commitments and have sufficient working capital for the day-to-day running of the practice.
- Managing Tax Liabilities – Where tax payments are made from practice accounts, reviewing drawings helps ensure sufficient funds are retained for future tax liabilities. For partners paying tax personally, it is important to set aside adequate funds from monthly drawings to meet obligations.
- Profitability Management – GP practice profits are subject to change due to contract amendments, cost increases, and other factors making it increasingly difficult to predict these. Regularly reviewing the profit levels used for drawings along with monitoring cashflow helps to monitor the overall financial position of the practice.
Considerations for Managing Drawings and Cashflow
- Quarterly or Annual Drawdowns: Some practices opt for lower monthly drawings with additional drawdowns on a quarterly or annual basis. This approach should help to relieve cashflow pressure and allows partners to take additional funds when profits are known, rather than being asked to introduce funds into the practice if drawings have been too high.
- Retaining a Reserve: Maintaining a financial buffer can help cover shortfalls and unexpected expenses without affecting monthly drawings.
- Ongoing Cashflow Monitoring: This should be done on an ongoing basis to keep an eye on the financial performance of the practice and anticipate any potential cashflow issues.
- Extended Cashflow Forecasts: Consider preparing forecasts beyond 12 months if there are changes in profit levels and to account for large tax and superannuation balances.
Regularly reviewing drawings levels helps prevent financial issues, ensures fair profit distribution, and maintains the overall financial health of the practice. If you would like to discuss your practice’s profitability, cashflow, or drawings position or require assistance with undertaking these calculations, please get in touch with a member of the BHP Healthcare team.
