Ensure you understand your accounts
Unless your private income is only a very modest amount, then you should receive a set of financial statements – accounts – each year summarising the financial activity of your business over a period of time. These statements usually cover a 12-month period but can be longer or shorter.
But the figures and terminology used within the accounts can make them difficult to understand when you first come across them.
Alec James follows up his first article last month by explaining some more key parts of the accounts to help make things clearer.
Balance sheet/Statement of financial position
It is always best practice to prepare a balance sheet as part of the annual accounts.
Companies and limited liability partnerships (LLPs) are required to prepare and submit one as part of the statutory accounts.
The balance sheet reconciles the assets and liabilities of the business and balances them to the share capital (for companies only) and reserves – or undrawn profits – of the business.
While preparing a balance sheet, certain reconciliations take place such as agreeing the bank account balances to the statements.
A reconciliation will also be performed between the fee income declared and comparing these to the receipts received during the financial year.
A healthy business will have a positive balance sheet. Having a negative one, where the liabilities exceed the company’s assets, can mean the business is insolvent.
That could see the business owners out of pocket, particularly if they have loaned money to their business. A negative balance sheet can also make obtaining any further finance difficult.
Having a balance sheet drawn up as part of your accounts generally costs more for your accountant to prepare but it gives you comfort that the fees have been declared correctly.
It can often be a false economy to ask your accountant to only prepare a profit and loss account, as this is more likely to raise an inquiry from HM Revenue and Customers (HMRC).
Key balance sheet terminology
There are a number of different headings included within the balance sheet which can be a little confusing to understand.
So listed below is a summary of the most commonly appearing headings used in medical business accounts:
Fixed assets
Fixed assets are usually shown as the original cost less any associated depreciation and impairment – an additional reduction in the value of the asset for things like damage to the asset. For most businesses, this is equipment they have purchased.
If your business has other fixed assets such as investments or property, depending on its size, your business may be required to prepare accounts on a ‘fair value basis’.
This is where the business is required to obtain valuations of the affected fixed assets each year and the movement in value is recorded.
It can be a very complex area. You should speak to your accountant to ensure you understand what information is required from you each year.
Debtors
Debtors are one of the most important numbers within the balance sheet. This shows the amount of money your business is owed from your customers, whether this is patients, insurers or other businesses such as solicitors.
You should regularly review the debtors of your business to ensure you are being paid for all work done.
There is usually a delay between generating the income and physically receiving the payment. However, clinical practices should not have much more than six to eight weeks of income outstanding at any time.
If your business has more than this, then you will need to review the balances to see if there are any older fees which require investigations.
Your secretary should regularly review the older balances and chase payment. If you find you have large numbers of older balances, you may wish to consider outsourcing your invoicing to a third party.
Medico-legal work
Your fee for medico-legal work can often take much longer to be received. When working in the medico-legal sector, you need to consider the time taken to receive payments within the rates you charge.
There may be instances where you receive payment before work is done and so your business has no debtors. It is important to record payments received in advance of a service being provided.
You should always provide your accountant with details of invoices which have not been paid as at the end of your financial year.
These should include balances that arose from the start of the financial year but also any remaining unpaid from previous years. Most software providers can supply this data.
Creditors
Creditors are liabilities of your business. There can be a range of different creditors such as trade creditors – money owed to your suppliers at the end of the financial year – tax liabilities or loans.
Most doctors’ private practices do not usually have large liabilities other than resulting tax liabilities.
But if your business has large liabilities, then you should review and plan for them to be settled to ensure your cash flow is not adversely affected.
Alec James is a partner at Sandison Easson & Co, specialist medical accountants
- See ‘Making Tax Digital’