In private practice, it can be common to think that your accounting system is just to record your activity to ensure an accurate computation of taxes – but it contains a wealth of useful information to help run your business. Ian Tongue looks at accounting systems and how to get the most from them.
What is an accounting system?
Systems can vary between businesses, but the key thing is that it records the financial activity of the business and that the transactions are complete and accurate.
From this source, your accountant can extract the information they require to prepare year-end accounts and tax. But there is plenty of useful information available real time to ensure you run your business as efficiently and profitably as possible.
Systems can range from simple spreadsheets to sophisticated computerised accounting packages. Often, consultants use a clinical management software package to run their business and many of those have accounting functions built in, although these would not be of the same functionality as a full-blown accounting software package.
Usually a full accounting package is not required and the necessary information will be available from the spreadsheets or clinical management system.
When running any business, you are required to keep ‘adequate’ accounting records by HM Revenue and Customs (HMRC).
It is not defined what this is, but the key requirements are for your system to report your income and expenses in a manner that provides a complete and accurate record of your financial activity.
If you are a VAT-registered business, the burden on record-keeping is higher and HMRC expects you to use an electronic system as a minimum and favours the mainstream accounting packages, but this is not mandatory.
It is important that you have a chronological record of your fee income and that you are able to identify when you were paid for the work and whether this was in full or if there is any outstanding amount.
The system should be able to provide a list of income earned by accounting period, which is a record of sales activity and you should be able to extract at any time the money owed to you. This is pretty much the most important part of the system. There should be a record of expenses by reference to when they were paid. But there can be costs that you are liable to pay that are outstanding and it is important to provide your accountant with anything of this nature, as these can be included within your accounts, or ‘accrued’ as we accountants call it. This ensures you receive tax relief on these costs at the earliest opportunity.
The ‘accruals’ concept basically means you declare your income when earned and not when you have received payment and you can claim costs when you have incurred the liability rather than paid for the cost.
For smaller businesses, you may be able to account to HMRC on a ‘cash’ basis, but often this is short lived for private practices so it is usually easier to account for things on an accruals basis from the start.
A regular review is essential to running any business. You should review the list of fee income recorded in your financial records and compare this to work done to ensure all work carried out is billed to the insurer, patient, solicitor or hospital.
It can often be surprising how many times we come across a client saying they – or their secretary – did not bill something and they lose out. If this element of your system is not working effectively, you could end up working for free.
Recording income and its makeup between different types of work is also extremely important for the payment of the correct medical defence premiums and you should be able to split the work between clinical and medico-legal as well as any NHS-indemnified work. Not having this split could result in paying the incorrect premium.
Reviewing receipts and matching them to your fee listing is essential because errors can arise on the payment received or the patient may have an excess to pay.
Make patients aware of any excess payable to you and chase it. It may seem a small amount of money initially but it soon adds up for a busy private practice.
For consultants carrying out medico-legal work, it is important to review your debtors regularly and chase debts vigorously as payment terms can be long.
It is essential for your accounting system to be able to report any outstanding fees from earlier years as well as the current year, because the figures in your accounts are a cumulative record of financial activity.
For a clinical or medico-legal practice, bad debts should be minimal, but often this is not the case. The most common culprit is the patient excess, but medico-legal work with onerous payment terms – for example, on settlement of the case – can also result in bad debts. Having a bad debt means you providing your work for nothing or less than you expected, so spend time reviewing any old debts and ensure payment terms are reasonable before doing any work.
Approach embassy work with caution. This work can turn heads due to the value, but in practice getting paid is often problematic and many embassies do not expect to pay on a timely basis or to pay full price.
Recording all expenses is very important to ensure you are maximising your expense claims and thereby minimising your taxable profit.
It can be common for costs to be paid through the business account as well as personally, particularly if you have transitioned from one trading structure to another – for example, from a sole trader to a limited company.
Your accounting records need to include all expenses, and for those not incurred through the business bank account, make sure these are recorded separately so your accountant can incorporate the appropriate claim within the accounts.
Having a robust accounting system is essential for the smooth and profitable running of your private practice.
Don’t see the system as just for sending to your accountant annually, as the information contained within the system will ensure that you maximise the return on your hard efforts.
Ensuring that all fees are recorded and collected together with maximising your expense claims ensures that you pay as little tax as possible. If in doubt about the quality of your accounting system, ask your accountant for some feedback on your systems.
Written for the Independent Practitioner Today, the full issue can be found here.