Private Practice Finance, Accounting & Tax
So if you've done all the pricing, marketing and sales work... I imagine you're probably raking it in hand over fist, right?! 💰
Well, then you've got a high-class problem: how to keep track of all that money you're making!! 😎 Oh, and the less fun problem of making sure you're ready for the tax bill... 😒
Alrighty then... let's make sure you're staying on top of your financial numbers. I know, I know. If you want to make sales and marketing look attractive, think about accounting for a moment. But stick with me, this can be a lot less painful than you think!
Part One: Bookkeeping
How many words do you know of that have three, consecutive repeating letters? Pretty cool, right? You'll kill it at your next Scrabble Tournament.
But, alas, not everything about bookkeeping is fun and games.
Nonetheless, bookkeeping is a really essential component of good business practices. Bookkeeping doesn't require a super complicated system. AND you should have a system. Here are some ideas & resources to keep your books tip top.
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Get a separate bank account (and credit card if you want to use one) for your private practice. Run all your business expenses and revenue through those accounts. Keep personal accounts personal and business accounts business. This will make your bookkeeping work SO much easier.
This doesn't need to be complicated. If you're operating without a formal business entity (e.g. as a sole proprietor) you can even use just a personal checking account. A business checking account is better, but don't let perfection be the enemy of progress here. If you are using a formal business entity like an LLC or Professional Corporation, having separate financial accounts is required to preserve the integrity (and benefits) of your business entity.
Your system can be as simple as a spreadsheet, or it could be as formal as QuickBooks or Xero or a software application of that nature. Regardless of which system you prefer, be sure and keep identifiable client data out of your bookkeeping software (unless it's HIPAA compliant). And I'm not aware of any HIPAA-compliant bookkeeping software packages, although there may be some out there.
If you use an EHR, like Simple Practice or Therapy Notes, you can keep all your client-level revenue data in that EHR system, and then just enter one single revenue entry in the bookkeeping software each week (or month). That's the approach I use in my financial planning business for similar privacy and regulatory reasons.
A disciplined practice of completing your bookkeeping on at least a monthly basis. Every week is better! Block off a time on your calendar and commit to sitting down and working on your numbers.
If you're anything like me, the anticipation (read: dread) of this task is SO much more painful than the actual task itself. And consider how you'll feel after you've actually sat down and done this! For me, the greater the dread and avoidance, the greater the feeling of accomplishment (and maybe even euphoria) when I actually sit down and do the thing.
I think scheduling your bookkeeping is a bit like exposure therapy. The more you realize working on your bookkeeping won't kill you, the less anxiety you'll have around it. It's just what you sit down and do at 3 pm on Thursdays.
Build a gentle yet disciplined practice of reviewing your financial statements at least every quarter.
Does your P&L feel like a foreign language? I feel you... you're not alone. Check out my blog & video where I explain a simple way to understand what your P&L tells you.
Don't do this in the same sitting as your bookkeeping! I'm a firm believer you need some space to let your brain rest and to be able to see the forest for the trees. I love playing around with numbers, but even I miss otherwise obvious things when I attempt and do too much in one sitting. I'd really suggest you consider scheduling a time where you aren't actually making any bookkeeping entries, you're just reviewing the financial reports created by your bookkeeping.
Will you understand everything you're looking at? Maybe not! And that's totally ok. Just practice engaging with and examining the books. And then as you begin to become more familiar with what your reports look like, you can learn more about what specific line items and other details mean.
I think Dr. Marie Fang has quite a few good videos on her YouTube channel on the topic of Finance & Accounting. A few to consider watching:
You might also check out Money Nuts & Bolts to help you get a bookkeeping system that works for YOU. Linzy is a therapist and a fellow numbers aficionado.
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Part Two: Taxes
Ok, bookkeeping was pretty fun. Right? Taxes? Ok, I'll give it to you... taxes are less fun.
There is a LOT to understand here. You don't need to be an expert on taxes, but understanding the basics will help you reduce any money anxiety and help you make more empowering financial decisions in your business.
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Taxes are confusing. And they're not fun. And yet, they are important. When it comes to understanding the taxes your pay on your income from your private practice, there are three big ones to keep in mind: income tax, FICA tax and payroll tax.
I know this might not be the most exciting content, but I think it's important to understand the basics of taxation. Why? Because it will help you both better prepare for taxes AND understand ways you can minimize your tax burden.
For an introduction to the basics around deductions, be sure and check out my video on Understanding your Practice P&L.
Some tax deductions are more complex (and more often forgotten) than others. Make sure and check out my blog post on the seven tax tips every therapist should know before filing their taxes.
Dr. Marie Fang has an informative video about Tax Deductions in Private Practice.
Melvin Varghese, host of Selling the Couch Podcast, has put together a helpful Tax Write-Off Checklist for Mental Health Private Practitioners.
S-Corp's are complex and something to really carefully consider (often in collaboration with a financial planner, CPA and/or attorney). Too often I see therapists jump into an S-Corp before they fully understand the downsides and whether to (non-trivial) increase in administrative and compliance burdens justify the tax savings. There are a lot of factors that go in to determining whether, and how much, tax an S-Corp can save you.
I continue to work on content to help guide you here, so be sure and subscribe to my blog so you don't miss an update!
You might also find this episode of The Practice of Therapy Podcast about taxes helpful.
One thing you might consider is using a profession tax preparer. Sure, it'll cost more than just blasting through Turbo Tax. But chances are they'll help you catch issues you would miss... and you'll get back several stressful hours of your life. Not only that, it gives you some space to more thoughtfully review the return they prepare to make sure there aren't any big picture errors. If you've been in the weeds for hours (or days...!) just getting the return completed, chances are you won't be in a great frame of mind to double check things at the end. Of course, partnering with a financial planner like me is another great way to have an extra set of eyes.
That said, don't put blind faith in tax preparers. They do make mistakes. And they have an insane workload for the first 3+ months of the year, so things can fall through the cracks. If you've been monitoring your financials over the course of the year, you'll be much more aware of what's going on and therefore much more likely to catch a mistake.
Part Three: Big Picture Thinking
I know... you might just want to be done with this section. But one last thing... and this last thing isn't something critical in place right out the gate.
And after you've gotten the basics of your practice and finances up and running, you may want to take a step back and do some bigger picture thinking, especially in the area of your practice's finances and where you want your practice to go in the years ahead.
Big Picture Thinking Resources
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Maybe you've heard of the Profit First concept. It's all based on the eponymous book by Mike Michalowicz. The basic concept is (you guessed it) you put the profit first.
What the heck does that mean? Well, the way most people think about it, profit is what's left over after you deduct all expenses. Profit First suggests that thinking is backwards. It advocates that you first set aside money for your profit and then only allow yourself to spend what's left over. It's naturally a bit more complicated than that, but that's the general idea. It's much more powerful than that simple explanation might lead you to believe!
To learn about Profit First you can always dive into the book. Or, my friend Julie Herres at Green Oak Accounting (who first introduced me to Profit First), has provided some great introductory content. You can check out her podcast interview with Michael here. Or, really dive in and watch her free webinar on Profit First in private practice.
In addition to making sure all the near-term financials are taken care of, it can be really helpful to build a longer-term view of how your business is performing. I build a five year financial model for all of my financial planning clients, and I'm working on some do-it-yourself worksheets. Be sure and subscribe to my mailing list so you don't miss when those DIY resources are published!