Don’t view accounts as just a big burden
Start a private practice: Accounting systems
Businesses are required to keep accounting records that include the financial information and calculations needed to prepare their accounts and tax return submissions. But robust systems can offer much more than that and can help you to run a successful business.
Systems will vary between businesses and as your private practice grows, you may need to evolve the function as you go along, advises Richard Norbury.
Software
When discussing accounting systems, often our minds will automatically think of accounting software, which is a good place to begin.
For those starting out in private practice, it may be sufficient to operate spreadsheets, which can be really useful and a powerful tool.
Often these are maintained by the consultant themselves or a family member and the level of transactions are relatively low. As such, you have a high level of control.
For established businesses or as private practice grows, it may be the case that a software package is more suitable. Consultants will often utilise clinical management software packages which have accounting functions built in.
As you would expect, these packages tend not to have the same functionality of a full accounting system, but this may not always be necessary. Some clinical management software will allow links to full accounting systems which may be more suited to larger, more complex businesses.
The important thing is that the system can accurately record financial information in an efficient manner that not only fulfils the requirements demanded by HM Revenue and Customers (HMRC) but also allows you to make important business decisions to ensure you run your business as efficiently as possible.
Invoicing
It is vital that fees are raised in a timely manner and you are able to track payment of invoices and identify slow payers so your team can chase payment if necessary. Fees raised should be in a chronological order and have sequential invoice numbers.
Modern software will allow for invoices to be generated directly from the program and it is important that you have systems in place to ensure a fee note is raised for all work done.
It is surprising how many times we come across a client saying they – or their secretary – did not bill something and they ultimately miss out. If this aspect of your business is not working effectively, you could end up working for free or even at a loss when taking into account costs.
It is common for medico-legal work to be paid months or sometimes years in arrears of actually performing the work, so it is important that a robust system is in place to ensure you are able to track these invoices.
For those of you who operate via a limited company, you will need to declare income based on when the work is undertaken. As the invoice is often raised a few days after the surgery or clinic, you should record the date of the work to allow your accountant to do a review at the year end.
Fees owing and bad debts
Regardless of which method you choose to record your income, reports should be available to allow you to check how much the business is owed at a point in time.
These reports will usually show each patient or client and have a further summary allowing you to see how long these fees have remained outstanding.
It is good practice to review them regularly to ensure timely payment and so the team can identify slow payers and bad debts.
Payment of invoices in private practice can sometimes be complicated and may well be received from more than one source, meaning some fees will be ‘part paid’, which makes it more important that accurate record-keeping is in place.
Bad debts should be kept to a minimum, but if they do exist, then be sure to identify them to your accountant. Review the ‘older than six months’ column on your reports.
If identified, you will be able to claim tax relief on specific bad debts. HMRC does expect evidence of the debt being chased to allow you to claim relief, so keep notes and correspondence to support these claims.
This is even more important if you are VAT-registered because you may be able to claim back VAT previously paid over to HMRC. Of course, some of the older debts may not be bad debts at all and simply need following up for payment.
The fees owed or ‘aged debtors’ report is also used by your accountant to reconcile the overall income received in your bank account and, when used properly, can help identify errors or problems early on so they can be rectified quickly.
It is not uncommon to encounter payments in advance in private practice. These payments often show as negative amounts on your aged debtors report, as you have received the cash but not yet raised an invoice.
Identifying these payments or having a separate system in place for recording such transactions may well be useful so that they are deferred into the correct tax year- end so you do not inadvertently pay tax earlier than needed.
VAT
If you are a VAT-registered business, such as a medico-legal practice, your systems will need to be able to cope with analysing the different aspects of VAT on income and expenditure and produce the relevant reports that you can rely upon to submit returns to HMRC.
There are various different VAT schemes available and you should consult with an accountant to choose the best options for your business.
Often, due to the amount of time it takes for a case to be settled and thus the amount of time it takes for you to be paid, you will pay VAT only when you receive payment of an invoice. This is known as ‘cash accounting’.
In these cases, it is important that the system can accurately record the dates and amounts received.
If you are reporting VAT under the traditional method, then you may be able to claim some VAT back from amounts suffered on your expenses.
This makes recording such expenses even more important, as not only are you claiming the tax relief on the expense, you are able to claim back VAT. Ensure you include all expenses including any expense that you may not have paid directly from the limited company bank account.
Outsourcing
Many consultants now outsource their finance function, which can prove efficient and save time.
If you decide to go down this route, bear in mind that these companies will use particular software across all of their clients, so you should ensure that the reports and function is compatible to your needs.
You should still review older debts, as the people processing the data will not have your intimate knowledge of the cases.
Security
The security of your financial affairs is obviously very important. Software and systems are now more sophisticated and will allow different functions such as remote access and multiple users, so you should ensure that your passwords are secure and changed regularly and your IT systems are sufficiently protected.
If you have staff members who are able to pay for items on behalf of the business, then this puts you at a higher risk. Consider having additional systems in place to help protect your business such as a maximum amount per transaction and approval of invoices before payment is allowed.
Making Tax Digital
For most businesses, Making Tax Digital (MTD) will be an administration and financial burden, so careful planning should be considered.
This includes planning to ensure that adequate systems and software are in place for you to meet the requirements as and when MTD becomes mandatory, so any implementations you make now should incorporate a review to ensure that is the case.
Accounting systems are often seen as a necessary evil to allow you to send annual reports to your accountant, but in reality they can also be a really useful management tool to ensure you make your business as successful as possible.
Richard Norbury (right) is a partner at Sandison Easson & Co, specialist medical accountants