Running your own therapy practice is a lot of work. You spend your days helping clients and making a difference in their lives. But the business aspects are also a big part of owning a therapy practice.
Bookkeeping is about more than just the numbers. It’s about making sure your practice is stable and poised for growth. Proper bookkeeping lays a foundation for financial success and helps you stay legally compliant.
Why Proper Bookkeeping is Critical for Success
Bookkeeping and taxes can seem tedious. After all, you started your practice to help people, not to become an accountant. Unfortunately, you must have one to support the other. Too often, therapists wait until tax season arrives to sift through the previous year’s worth of receipts and expenses. This approach is inefficient, disorganized, and stressful.
Rather than scrambling in April, it’s in your best interests to sort your books along the way. Aside from tax preparedness, here are some other reasons that proper accounting is critical to your practice’s success.
Monitors Your Practice’s Financial Health
Consistent monitoring gives you clear insight into your practice’s financial health. Therapists in private practice tend to make two critical errors. They overestimate their income and underestimate expenses.
Without a clear understanding of the actual amounts going in and out of your practice, sustaining your business long-term may be challenging.
But with regular tracking of income and expenses, you’ll have a transparent view of your money management and you’ll never be caught unprepared for sudden expenses.
Allows for Informed Growth Decisions
Strong bookkeeping helps you make informed growth decisions. Whether your goal is to remain a solo practitioner or to expand into owning a group practice, having a clear financial vision is vital. Proper accounting means you’ll have detailed financial reports to help guide your decisions. It’ll keep you from getting in over your head while helping you develop a strategic financial plan for accomplishing the growth you desire.
Bookkeeping Best Practices
Maintaining clear, organized financial records through proper bookkeeping is essential for therapy practices. But how do you do it? Here are some best practices to consider.
Understand the Chart of Accounts
The chart of accounts is a categorized list of how your practice earns and spends money. It’s an important piece when setting up an accounting system.
Think of your accounts as financial categories to help you label income and expenses. The categories for your business may vary, but here are five general ones you can use as a starting point:
- Assets – Resources you own
- Liabilities – Debts you owe for in the future
- Revenue – Income you make after everything is paid
- Expenses – Bills you must pay
- Equity – Interest or value in your business
Understanding your chart gives you an overview of how money moves within your practice.
Complete a Daily Financial Data Update
Whatever accounting software you choose to use should sync daily with your:
- Bank account
- Credit card feeds
- Sales data
Syncing lets you get a daily, updated look at all your accounts, making it easier to spot any issues or inaccuracies almost immediately. You won’t have to wait for monthly statements to notice any concerns.
Record and Categorize Expenses
Get in the habit of reporting expenses and uploading receipts immediately by using apps or software. Doing so prevents you from accumulating disorganized receipts or losing documents and ensures you’re accurately tracking expenses.
Essential Financial Documents
To have a good understanding of the financial health of your business, you’ll need to keep some financial documents up to date.
Profit and Loss Statements (P&L)
Profit and loss statements provide a look into:
- How much money comes into your practice
- How much you’re spending
- What the resulting profit is
You can generate profit and loss statements monthly or quarterly to help monitor your practice’s financial health and plan for the future.
While P&L statements focus on revenue and expenses, balance sheets focus on assets and liabilities. Assets include anything of cash value you own through your practice. Liabilities represent money you owe. Balance sheets offer a complete view of your practice’s financial position at any point in time.
Cash Flow Statements
Cash flow statements track the movement of cash in and out of your business, categorizing the cash into three categories:
- Investing – The investments you’ve made, like purchasing property or equipment, that are now part of the overall value of your practice.
- Operating – The cash flow you received from normal operating activities, so in your situation, from providing therapy services.
- Financing Activities – Areas of income from financing, like cashing in or earning from stocks or money from a small business loan.
Cash flow statements are not the same as P&L statements. P&L statements measure the profitability of your business. Cash flow statements help you understand where your money is coming from, where it’s going, and how much cash you have.
Cash flow is different from profit. While cash flow looks at the total money movement, profit indicates the amount you have left after subtracting all expenses. Your goal is to have a positive net cash flow to ensure your practice can operate, even if you’re not making a large profit.
Effective Expense Management
Managing expenses is much more than just a financial task. It’s a strategic move that helps make sure your practice is on firm footing and that you can continue serving your clients.
Expense management is more than just tracking and labeling expenses. It involves policies and procedures to help you manage spending.
Benefits of Effective Expense Management
There are obvious benefits of effective expense management, including:
- Organized finances
- Legal compliance for tax deductions
- Controlled business spending
- Protection against fraud
Beyond these, expense management empowers you to make educated decisions by being aware of where your practice’s money is going and assessing whether these are the best expenditures in the future.
Expense Management Best Practices
Expense management should be practical. These best practices provide you with a practical framework that is simple, straightforward, and accessible:
- Make expense reports convenient and user-friendly
- Have clear timeframes to speed up the reimbursement process
- Use automated systems to help reduce manual labor
- Regularly audit employee-initiated expenses
Taking a proactive approach to expense management will help you find any issues or potential fraud early on. You can address concerns almost immediately, instead of waiting until larger issues develop.
Automating Expense Management
In today’s digital age, automating whatever routine practices you can is just smart. You can automate many time-consuming, manual tasks by using digital solutions in your practice.
Automating expense management isn’t just great for saving time. It also helps minimize errors.
Modern expense management software has features like:
- Real-time policy checks
- Faster approval times
- Centralized data storage
Each of these features helps you streamline and save time while maintaining a clear and updated view of your practice’s finances.
Common Mistakes to Avoid
When it comes to monitoring your private practice’s finances, common mistakes can completely derail your practice’s financial health. Here are some common mistakes you should try to avoid.
Mixing Business and Personal Finances
At first, it may seem convenient to blend personal and business finances, especially since you likely need a salary for your personal expenses and money for your business. But not keeping your finances separate can cause serious complications down the road.
Mixing business and personal finances exposes your assets to financial risks. This practice also complicates tax management. It can potentially lead to errors in deductions and an increased risk of an IRS audit.
Even though it may seem in the beginning like there isn’t enough money to divide, it’s best to do so right from the start. Dividing personal and business finances also helps you be realistic about what you can spend in either facet of your life.
Mixing expenses can also cause you to lose tax deductions. To claim deductions and avoid scrutiny from the IRS, you must properly categorize and track your business finances without clutter from personal spending or savings.
Classifying Employees and Contractors Incorrectly
You could face severe penalties if you incorrectly categorize employees as independent contractors. Understanding the differences between employees and contractors and their associated tax implications is essential.
Not Reconciling Bank Statements
Reconciling bank statements on a regular, scheduled basis helps validate your records. Failing to do this regularly might lead to errors or even inadvertent fraud. It’s difficult to accurately remember what happened financially months ago. It makes much more sense to reconcile as you go.
Overlooking Petty Cash
It may seem like more trouble than it’s worth to track small cash expenses, but these seemingly unimportant expenses can add up over time.
Petty cash expenses also could be potential tax deductions, so they aren’t something to be flippant about.
Balance Sheet Recording Errors
One mistake often made in private practice accounting is recording items that should go on the balance sheet on the P&L statement instead. For example, treating a loan as income or recording a liability payment as a business expense.
Loans increase your cash balance, but you shouldn’t consider them revenue or profits since you have to repay them. You’ll overstate your earnings if you treat a loan as income on your books.
Similarly, liability payments don’t count as a new expense. Instead, those payments are reducing an existing obligation. Recording liability payments as an expense would mean double-counting that cost on your financial statements.
Not Organizing Your Record-Keeping Process
Digital record-keeping software makes storing financial records and receipts much simpler than the old days of stuffing papers into filing cabinets and receipts into empty shoe boxes. Cloud-based accounting platforms allow you to easily upload your expenses and receipts and categorize them appropriately.
While digital storage is easier, you still have to be able to categorize and organize your receipts. If you dump every receipt into one folder, that defeats the purpose of organized record-keeping.
When to Ask for Professional Help
Managing your practice’s finances can be exhausting because it’s essentially like a full-time job on top of caring for your clients. There’s no shame in seeking professional help to support your business. Here are signs that it may be time to outsource your practice’s financial monitoring.
If DIY bookkeeping is more time-consuming than you can afford, it’s probably time to seek professional assistance. Remember that as a business owner, your time is money, so every minute you spend on your practice’s finances has a dollar equivalent. Is this the best place to spend your value?
Perhaps you have enough time for bookkeeping but no time for anything else. Even though you’re a business owner, you’re also a person. You need time for more than just work, including time for hobbies, with family and friends, and for self-care.
If you have no time for anything else between seeing clients and managing the books, then it’s probably time for professional help.
You shouldn’t fall behind on your financial monitoring. You’ll be vulnerable to errors, risks, and fraud. If you’re having trouble staying on top of the books and your financial records no longer reflect the real-time state of your finances, it’s probably time to outsource.
If you’ve been relying on your accountant to help with the books, you could be spending more than you need to. Certified public accountants generally charge more than bookkeepers because of their education and certifications.
A bookkeeper may be the more cost-effective option. Hiring a bookkeeper can also help you ensure you’re getting regular updates on your practice’s finances.
If you’ve missed out on write-offs or tax season is overly stressful, that’s probably a sign that professional help could streamline your process.
Unpredictable Cash Flow
If you’re unsure about how much money you’re making or stressed about making payments, you probably need professional help with regular cash flow statements.
Lack of Expertise or Interest
Maybe you can keep the books for your practice, but you just don’t want to. Part of being a business owner is knowing your strengths and when your time or expertise is better spent elsewhere. If you lack the expertise you need to track all the financial documents or you just don’t want to do it, hire it out if you can afford to.
Where to Find Qualified Accounting Professionals
If you determine that you need to hire a bookkeeper, the next step is finding a qualified candidate. You can’t just work with anyone because business finances require expertise.
Here’s where to find a qualified accounting professional to help with bookkeeping for your therapy practice.
Remember, before you start searching for a candidate, identify what your needs are. Do you need someone who can set up an accounting system from scratch, or are you looking for someone with expertise in the software you already use?
Will the bookkeeper be responsible for tax filings or other specific tasks?
Knowing what you need will help you in your search.
Once you’ve identified your needs, it’s time to scout a candidate. Websites like Upwork offer a vast pool of freelance accountants and bookkeepers actively looking for work.
When posting a job on Upwork or a similar site, be sure to provide a specific description of your expectations, including the exact accounting services you need. The more detailed you are, the more likely you are to attract the right talent.
Another way to find candidates is to check with professional organizations, like the National Association of Certified Public Bookkeepers. Professionals affiliated with such groups typically indicate a deeper level of commitment. You also can ask colleagues you know through these organizations for their recommendations.
Regardless of where you find help, check their experiences and references to see whether they understand the nuances of bookkeeping for therapists. If you want them to use existing software, make sure they’re familiar with it.
Bookkeeping for Therapists the Easy Way
Navigating bookkeeping for your private practice requires knowledge, attention to detail, and the right tools. As a mental health professional, your primary focus should be on providing care, not worrying about dotting the Is and crossing the Ts of your finances. That’s why it may be best to hire a bookkeeper while you focus on growing your practice to support that function.
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