By Bradley Woolridge, Director at Burns Acutt
Running a successful private practice requires more than simply knowing how much cash you have in the bank. The management of company accounts remains an important aspect to the growth of that practice. A practice is of course, a business, in every way. Financial management should ideally be an ongoing process, I’d urge that you do monthly management accounts, meet with your tax practitioner at least quarterly and have a sound investment strategy with your financial advisor for the effective utilization of your profits.
It goes without saying that you will have reduced stress and a clearer vision of where your business stands at any point in the year, allowing you to make critical decisions and complete complex tasks ahead of time. Your net wealth will grow at an accelerated rate and with a little luck, you will either end up with a higher quality lifestyle or be in a position to consider early retirement. Increased travel, more family time or spending more time on the sports and cultural activities that you love, are all possible with improved planning.
One key aspect of cash management is the ability to forecast both inflows and outflows. In South Africa, Medical professionals tend to be tied to one particular medical aid for a fairly large proportion of their receipts. As such, any admin issues or technical glitches can have a catastrophic effect on the practice, notwithstanding any additional problems that may arise from the medical aid’s side.
Then there are those large payment months, August and February, when the biggest tax payments are usually made. These are especially important to plan for ahead of time. Monthly management accounts can include tax return preparation services, so that the process can run smoothly and keep you in control.
Of course, some practices have to purchase large amounts of medication, and these bills are often due before enough cash can be generated, which also naturally places a heavy burden on cash reserves.
In order to keep your business liquid ensuring there is available cash reserves at all times, the following general tips apply:
1. Keep at least 30, but preferably 60 days’ worth of working capital available for general expenses, at all times. This should cover salaries, rental, general overheads and some allocation towards large creditors like medication and dressings.
2. Have a set of management accounts with a cash flow/profit forecast. These need not be too detailed or complex, but should make provision for the following:
a. Indicate key monthly inflows and the dates they are expected to arrive. Make sure they are sufficient to cover all operating expenses. Expected arrival dates should be monitored to ensure there are no delays in receipts from the medical aid.
b. Large outflows like the aforementioned tax or bulk payments, should be catered for in the cash plan.
All of the above should be covered before you consider paying yourself and any partners a bonus or dividend.
The great thing about maintaining a sound financial environment is not only that it reduces stress, but the increased control will help increase your profitability so that you can regularly benefit from controlled profit. You can choose to do this on an adhoc basis via bonus or dividend pay outs, or you may even opt for a monthly salary adjustment, with the caveat being it is always linked to the numbers and subject to the controlled distribution of profit.
Personally, a salary adjustment is my favourite model. It means that because your salary is low, your cash plan is reduced accordingly. Each month, usually working one month in arrears and based solely on profit achieved in cash, you can then receive an affordable bonus, and once your R1.5million annual earnings bracket has been reached, you start to earn dividends. This is relevant to February 2018 tax planning and was not the case for February 2017. A classic example of where remuneration structuring can be impacted by legislation changes, failing which, your tax efficiency starts to become sub optimal.
This same model can be used for senior staff and potential partners, to further benefit you by mitigating the risk involved in your low earning months.
Implicit to the above, of course, is you require either time enough to do this, or a financial partner competent enough to do it for you. With an able financial partner on board, one hour a month will be all that is required from you in order to better understand your finances and make the relevant financial decisions.
To find out how your practice can benefit from management accounting services, I would like to offer you a complimentary consultation with Burns Acutt. We do not charge as the first conversation is all about seeing what we can achieve, together.
Our philosophy is that if we can be of assistance, add value and make a positive difference in your life then the rest will take care of itself.