Simple. A budget is the essential building block for wealth-creation regardless of the business or profession. But before you curl up like a scorched leaf, all the successful healthcare practices we deal with say creating and managing their budget was the turning point for their wealth-creation.
What is a budget?
Despite popular belief, a budget is neither punishment nor deprivation. Instead, a budget is your ticket to financial freedom. The purpose of a budget is to:
- control finances;
- ensure the cash-flow can fund current commitments;
- enable the practice to meet its goals and make confident financial decisions; and
- make sure sufficient funds are available to finance future growth.
What does a budget do?
A budget supports your practice’s business plan by moderating cash-flow.
Why is a budget important?
To build wealth, you need surplus cash. The only way to achieve a surplus cash-flow is for the practice to spend less than it earns. Sounds simple, right?
In our experience, tax liabilities are the reason most medical professionals struggle to maintain healthy cash reserves.
Unforeseen tax liabilities blow budgets
Employees have PAYG tax deducted with every pay and only lodge an end of the financial year tax return. Yet, businesses pay tax throughout the year. These quarterly tax instalments are PAYG or BAS, depending on the business’s GST registration status.
The Australian Tax Office (ATO) uses your practice’s most recent tax return to determine the quarterly tax instalments due for the following year. For example, if your tax liability for the previous year was $150,000, your four tax instalments for the next year would be $37,500. In theory, paying these instalments means tax owing at the end of the current financial year is minimal. However, it rarely works out that way.
The more common scenario is growing practices find their cash-flow blindsided by a hefty end of financial year tax bill along with a perplexing catch-up tax payment. See Doctor Paul’s example. (Note: Dr Paul is hypothetical and the figures approximations only.)
Scenario: Doctor Paul
Doctor Paul started his new practice in July 2014. His taxable income for the 2014-15 financial year was $242,000.
One year later, Doctor Paul’s clinic is thriving. His taxable income jumps to $495,000.
So, at the end of the financial year, Doctors Paul’s tax liabilities look like this:
- March-May 2016, $79,805 tax liability payable for 2014-15 year.
- May 2016, a further $77,000 catch-up tax instalment is payable for the 2015-16 year. Why? The ATO is basing calculations on the 2014-15 end-of-year tax return and only has one instalment to collect the liability.
Now comes the sting.
- For the coming 2016-17 financial year, $19,800 will be due every quarter (based on the taxable income for 2014-15).
- May 2017, the total tax payable is $193,600 on a taxable income of $495,000. Plus, an additional catch-up tax payment of $110,000 for the 2015-16 year will be due.
You can see how easy it is for tax liabilities to rise out of nowhere and capsize financial goals.
Until Doctor Paul’s practice reaches its maximum earning potential, his tax liabilities will keep compounding. Thus, it is no surprise tax is the number one reason why most healthcare practices find it difficult to budget or fall off the financial rails.
Forecasting a practice’s income growth and calculating tax liabilities in advance takes the skill of both a financial planner and accountant. While most bookkeepers and reception staff managing creditor and debtor accounts are excellent at their jobs, sophisticated tax liability calculations along with financial forecasting and budgeting are beyond their skillset.
From our experience, any clinic relying on their bookkeeper and accounts staff to identify potential cash flow pressure points will eventually find themselves blindsided by unforeseen taxes.
Our medical accounting experts can help you with your financial planning, tax forecasting and budgeting. Together we can turn your practice’s wealth creation goals into an economic reality.