Most new practice owners are more focused on how to make money than how to track it when first launching a new practice. Setting up your business structure and understanding your profit and loss statement is essential to running a successful healthcare business. Early financial missteps can be time-consuming and costly, leading to cash flow issues, missed opportunities for growth or even insolvency.
Healthcare practice accounting experts and owners of Healthcare Accounting Solutions, David Light, PT, MBA, and Kevin Reynolds, CPA, offer advice on how to set up your practice accounting to ensure your business thrives.
Step 1: Set up your business entity
The first accounting decision you’ll need to make is whether to set up an LLC or an S-corp.
S corporations are popular because they allow you to save on Social Security and Medicare taxes. With an S-corp, you can pay yourself a salary, and the rest of the profits can be distributed as dividends. Those dividends are subject to income tax but not Social Security and Medicare taxes. An S-corp does require some extra accounting steps, though.
On the other hand, if you’re borrowing money and anticipate losses in the first year, an LLC might be better. With an LLC, you can deduct those losses on your personal tax return if you personally guarantee the debt, which isn’t allowed with an S corporation.
Best practice: Talk to an accounting expert about which business entity is right for you. You can change it later, although this will require some administrative effort.
Separate your business and personal finances
When you’re first starting to work for yourself, many new business owners make the mistake of using a personal credit card and bank account for the business. This is especially true for those who first start a side hustle without plans to make it a bigger business.
Best practice: Open a separate business banking account and credit card. Even if your practice starts small, separating it from your personal accounts makes bookkeeping easier.
Step 2: Start with a solid bookkeeping system
One of the most common mistakes practice owners make is underestimating the importance of good bookkeeping. Even if you have a telehealth practice and your expenses are minimal, you need to track them with bookkeeping software. Many new practice owners make the mistake of trying to track income and expenses on a simple spreadsheet, which is time-consuming and can result in serious financial discrepancies.
Plus, bookkeeping software can help you easily generate reports, like a balance sheet, to understand your business. “A balance sheet gives you a snapshot of your business’s assets and liabilities and provides a clearer picture of where you are at any point in time. It shows the overall health of your business,” says Reynolds.
You’ll also need this information if you ever want to get a business loan from a bank.
Best practice: Adopt bookkeeping software early on, such as QuickBooks, and use it consistently. These platforms are easy to use and can automate your financial tracking.
If you don’t have the time or expertise to manage it yourself, consider hiring a professional bookkeeper.
Step 3: Meticulously track all income and expenses
Keeping track of your cash flow, both income and expenses, is critical for understanding your practice’s financial health. This may seem straightforward, but when things get busy, it’s easy to let smaller expenses or payments build-up or slip through the cracks. Some owners might even neglect to track their hours or services provided, especially if they offer cash-based services or contract work.
Light has seen clinicians firsthand who make their own invoices and are then paid mostly in cash. This disorganized method can result in underpayment. “If you don’t track it, you’re never going to know how much you should get paid,” he says.
Best practice: Create a standardized process for logging every transaction, whether invoice, expense or payment. If you offer services on a contract or cash basis, use a consistent method for tracking visits, time spent and payments received.
Use an invoicing tool to track your hours and services. This will ensure that you don’t miss out on revenue and can more easily detect missed or underpaid payments.
Step 4: Code transactions consistently
Misclassifying transactions can lead to a skewed financial picture of your practice. For example, if expenses like office supplies, rent or equipment purchases are lumped together or incorrectly labeled, you won’t get a clear sense of where your money is going and how to save.
Best practice: Develop a system for transaction categorization that ensures expenses are aligned. This keeps your books clean and helps you make better business decisions for your practice.
Step 5: Delegate financial tasks to a professional
While it may be tempting to handle everything yourself or ask a favor from your relative who’s an accountant, managing your accounting without a professional who understands your business can be costly.
An accountant can be an important advisor in your business throughout the year, not just during tax season. “A practice management system helps you understand your clinical operation’s key performance issues on a monthly basis and for the sake of tax returns,” says Light.
By delegating this responsibility, you can focus on your core competencies while knowing your finances are in order.
Best practice: Hire an accountant or bookkeeping service to regularly review your financials. A professional will help you track expenses and income and provide valuable insights into tax planning, cash flow management and profitability.
Step 6: Plan for taxes early
Taxes can come back to bite you if you don’t plan for them early. Many new practice owners who neglect to plan for taxes quarterly are hit with a hefty tax bill at year-end.
Best practice: Set aside a percentage of your monthly revenue specifically for taxes, usually around 25-30%. Work with an accountant to understand your tax obligations, including quarterly tax payments, deductions and potential credits.
Managing the finances of a new practice can be overwhelming, but with careful planning and the right accounting practices, you can set a strong financial foundation for your business.
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