“It’s a flawed business model” Anonymous (to protect the identify)
Last week I heard for the third time, and not all from the same person or CCG, that a federation which requires income is a “flawed business model”. On questioning what type of business the federation Board should be running in preference to the “flawed business model” it was quickly apparent the person sitting opposite had no comprehension of what running any sort of business was really like.
In essence, the view expressed was that the board should work for free, the practices should work for free, there should be no overheads, no insurance for Directors, no legal or accountancy support, no infrastructure; indeed no spending of any kind and therefore the federation would need no income and could function perfectly well. They could simply “focus on savings for practices and sorting out back office function”; all of course assuming people would work without pay to fix all of that.
I was then advised that other federations appear to manage this way, and consequently they could not understand why this particular federation could also not function similarly.
The answer to how this federation functions is simple: they raised over £200,000 in seed capital to pay the Directors for their time and work. Clearly at some point they will need income to replenish the company bank account; however, this seems to be lost on those who still view a federation that needs income as a “flawed business model”.
"In business, words are words, explanations are explanations, promises are promises, but only performance is reality." Harold Geneon, Industrialist
Turnover is vanity, profit is sanity but cash is king!
Put simply, there is no point in generating turnover that you cannot make a profit on, and if you don’t remain profitable and keep the cash coming in to your company, disaster looms.
As Lord Sugar put it on The Apprentice a couple of years back, “any idiot can sell £10 notes for £9; the key is to sell them for £11”.
In terms of a newly formed Federation, you need profitable turnover in order to pay the board and workforce, cover the company expenses and provide cash to allow you to develop bids and tenders.
Now, I can hear people saying I’m teaching Granny to suck eggs here, and to an extent I am; however, I regularly see potential disasters looming large, where people have costed business plans and proposal with nothing other than the money to pay the providers. No running costs, no management allowance, nothing to cover superannuation and tax; I could go on but you get the picture. The issue at play is a focus on turnover.
CCGs are also falling into this trap. They assume that if the Federation takes on the running of Local Enhanced Services the Practices will still be paid the same amount as previously under the direct arrangements, without recognising, or building in, a management allowance for the federation to run and manage the contracts. As indicated in a previous blog, the only way out in this scenario is either to give the practices a pay cut or not take on the work – I think you can all guess which I favour!
I find that scenario even more amazing when I stop to consider that CCGs get over £20 per head of population in management costs, and yet appear to expect the federations to run on nothing.
Roll forwards to the end of my week and a call from an FT that wants to subcontract the federation a piece of work. After detailing what they were after and ascertaining from me whether or not I thought the federation would be interested, came the comment “and of course we know the federation will want to add a % to cover running costs”.
In essence, you need to stop and carefully plan every project, ensuring you cost every aspect of the delivery and management of the contract. For example, for some of the longer term contracts, where you may employ salaried staff, that is also likely to include such as appraisal.
Please don’t leave yourself with a problem by focusing on turnover; remember you have running costs, which need to be covered by the “profit” the company makes on delivering a service. Anything left over after that will depend on your skills, and what you do with that will depend on your company documentation, and whether you are for profit or not for profit. After that the key is to have good cashflow that keeps the company running smoothly.
The federation business model, whether for profit or not for profit, will need an income and a profit to stay in business.
If you are thinking about forming a super practice or federating, and would like more information on how BW Medical Accountants can support you, or to arrange to speak to one of our experts please contact enquiry@bw-medical.co.uk or call 0191 653 1022.
Additionally, if you should have questions for us please email rachael.mackay@bw-medical.co.uk and we will do our best to answer these within the blog.