Top Tier Tips: Bookkeeping for Therapists
Effective bookkeeping is crucial for the success of any therapy practice.
Whether you’re a solo act or you have a group practice, proper financial management ensures that you can make informed decisions, comply with tax regulations, and maintain the financial health of your practice. Good news: with some fairly simple to implement tips, you can be well on your way to better books and an overall better financial picture.
We’re going to cover some of the top bookkeeping tips for therapy practices to help you streamline your financial processes, reduce stress, and achieve greater stability. Let’s dive in!
Tip 1: Keep Personal and Business Finances Separate
One of the most important bookkeeping practices is to keep your personal and business finances separate. Mixing these finances can lead to confusion, inaccurate records, and potential legal issues. Whether you’re DIY-ing your books or you hire someone to manage them, this is super important! Here’s how you can maintain separation:
Open Separate Bank Accounts: Ensure you have a dedicated business bank account and credit card for your therapy practice. This makes it easier to track business-related transactions and ensures that your financial records are accurate. This also becomes incredibly important around tax time.
Track Personal Withdrawals: If you need to withdraw money from your business for personal use, document it clearly. Record the amount and the reason for the withdrawal. This would normally be recorded in your accounting software in a separate ledger account called “Owner’s Draw”. This practice helps you keep a clear picture of your business finances and makes tax time much simpler.
Separate Expense Tracking: Use different methods for tracking business and personal expenses. For example, keep business receipts in a separate folder or digital storage from personal receipts. This will help you stay organized and make financial reviews more straightforward. It’s also highly recommended to upload any receipts (especially above a certain threshold) to a receipt management system, especially if you’re working with a virtual-based accountant. This is, again, critical for year end tax time. (Are we seeing a theme here?)
Tip 2: Embrace Your Accounting Software
Many therapists start with simple DIY bookkeeping in spreadsheets. After some time, though, it becomes extremely overwhelming and near-impossible to track everything once you’ve started to grow. Bringing accounting software into your therapy practice can revolutionize the way you handle your bookkeeping. Here’s why it’s beneficial and how to get started:
Benefits:
Time-Saving Automation: Accounting software can automate routine tasks such as invoicing, expense tracking, and payroll, freeing up your time to focus on your clients. Setting these up can be a bit daunting, however, so it would be wise to consult with experts if you’re unsure.
Accuracy: Automated calculations reduce the risk of human error, ensuring your financial records are accurate and reliable.
Real-Time Financial Insights: With accounting software, you can access up-to-date financial information anytime. This allows you to make informed decisions quickly.
Getting Started:
Choose the Right Software: Evaluate your practice’s needs and select the accounting software that best fits those needs. We highly recommend QuickBooks Online for a variety of reasons such as its ability to connect to many other apps, simple connections to bank accounts, and ability to scale.
Set Up Your Account: Follow the software’s setup prompts to enter your business information, connect your bank accounts, and customize your settings.
Learn the Basics: Take advantage of tutorials and customer support to learn how to use the software effectively. While you soon may pass on the work to an accountant, it’s wise to at least know the basics.
Tip 3: Track All Expenses
As your practice grows, so will the number of different expenses. You’ll likely end up with subscriptions to various software platforms, marketing expenses, cost of your website, and various others. After the first few months, this can get really challenging to keep track of in a simple spreadsheet or without help. Maintaining a detailed record of all your expenses is, however, vital for managing your budget and preparing for taxes. Here's how you can start effectively tracking your expenses:
Methods for Tracking Expenses:
Use Expense Tracking Software:
Utilize accounting software (it often has built in expense tracking) or another app if you wish. These tools can automatically sync with your bank accounts, making it easier to record and organize transactions. If you already are working with an accountant, they may have a recommendation for a system that will be convenient and accurate.
Keep Digital or Physical Receipts:
Maintain a dedicated space for storing business receipts. If you prefer digital storage, use a scanning app to create digital copies of your receipts. This helps ensure you have all necessary documentation for tax time. Rarely you might have expenses that only have a physical receipt, but these can uploaded by simply scanning with your phone.
Categorize Expenses:
Consistently categorize your expenses to see where your money is going. Common categories include office supplies, marketing, travel, and professional development. Proper categorization helps you understand your spending patterns and identify areas where you can cut costs. If you’re working with a bookkeeper for therapists, they will be handling this for you. They may, however, ask about expense amounts they can’t immediately determine the category.
Benefits of Tracking Expenses:
Budget Management: Helps you stay within your budget by providing a clear picture of your spending habits.
Tax Preparation: Makes it easier to prepare for taxes by having all necessary documentation and categorization in place. Your tax preparer will not only be appreciative but have much fewer questions/inquiries.
Financial Insight: Gives you a better understanding of your practice's financial health, allowing you to make informed decisions about where to allocate resources.
Best Practices:
Consistent Recording: Make it a habit to record expenses as they occur to avoid falling behind. Again, if you have a bookkeeper for therapists, they will likely help you get into a habit of keeping everything up to date.
Review Regularly: Regularly review your expenses to ensure they are categorized correctly and to identify any unusual spending patterns. Even if you’re not the one doing this, it’s wise to review and stay mindful about where the practice’s money is going.
Want to reduce your expenses? We have a short guide with some actionable tips to reducing your therapy practice expenses.
Tip 4: Set Aside Money for Taxes
We’ve all felt the dread that starts coming on early in the year. Tax time, believe it or not, does not have to be stressful! Preparing for taxes throughout the year can prevent financial strain and ensure you are ready when tax season arrives. Here are some starter tips on how to manage your tax obligations effectively:
Tips for Tax Preparation:
Estimate Quarterly Taxes:
Use your previous year’s tax return to estimate your quarterly tax payments. Generally you want to be paying quarterly taxes that will add up to at least 100% of your previous year’s tax liability. This helps you avoid underpayment penalties and manage cash flow.
While it can vary, a general rule of thumb is 25% of your income. It seems like a lot, but taking this hit now is MUCH better than having an ugly surprise at tax time.
Create a Tax Fund:
Set aside a portion of your income each month in a separate account specifically for taxes. This ensures you have the necessary funds when tax payments are due.
Track Tax-Deductible Expenses:
Keep detailed records of expenses that are tax-deductible, such as office supplies, professional development, and travel expenses. This can significantly reduce your taxable income. Most people struggle with this, so it’s highly recommended to consult with a CPA about what is truly deductible.
Benefits of Setting Aside Money for Taxes:
Financial Preparedness: Ensures you have the funds available to pay your taxes on time, avoiding penalties and interest.
Stress Reduction: Reduces the stress and financial strain of large, unexpected tax payments. Anyone that has had an unfortunate tax surprise will tell you that it’s absolutely worth it to plan ahead.
Improved Cash Flow Management: Helps you manage your cash flow by planning for tax payments in advance. If you have already set aside the funds for your taxes, it becomes much clearer how much you have left for other purposes.
Best Practices:
Consult a Tax Professional: If you’re unsure about your tax obligations, consider consulting a tax professional or CPA to ensure compliance and optimize your tax strategy.
Review and Adjust Estimates: Regularly review your income and expenses to adjust your tax estimates as needed.
Tip 5: Review Financial Reports Regularly
Regularly reviewing your financial reports is essential for maintaining the financial health of your therapy practice. Like most things in life, it’s quite difficult to know where you stand without accurate measurement of progress. These reports provide valuable insights into your practice’s performance and help you make informed decisions.
Key Reports to Review:
Profit and Loss Statement:
Purpose: Arguably the most important report, it shows your income and expenses over a specific period, highlighting your practice’s profitability.
How to Use: Regularly review to identify trends, control costs, and increase revenues.
Balance Sheet:
Purpose: Summarizes your assets, liabilities, and equity at a specific point in time, giving you a snapshot of your financial health.
How to Use: Use it to evaluate your practice’s financial stability and make strategic decisions about investments and debt management.
Cash Flow Statement:
Purpose: Tracks the flow of cash in and out of your practice, helping you manage your liquidity.
How to Use: Review to ensure you have enough cash to cover expenses and to plan for future financial needs.
Benefits of Regular Financial Reviews:
Informed Decision-Making: Provides the data needed to make strategic decisions and plan for growth.
Financial Health Monitoring: Helps you monitor the overall financial health of your practice and identify potential issues early.
Goal Setting and Tracking: Assists in setting realistic financial goals and tracking progress towards achieving them.
Best Practices:
Set Regular Review Dates: Schedule monthly or quarterly reviews to stay on top of your finances.
This can be a great time to work on setting financial goals for your therapy practice!
Use Accounting Software: Utilize the reporting features in your accounting software to generate accurate and detailed reports.
Consult with a Professional: Consider working with an accountant to help interpret the reports and provide additional insights.
Wrapping Up
For many (or maybe most), managing the financial side of one’s therapy practice can be daunting and just plain not fun. Hopefully these tips have helped alleviate some of those negative feelings or at least gave you the start of an action plan to manage the financial side of your business. Most practice owners will hire someone to manage much of this, but many choose to DIY in the very earliest days of their practice. Whichever path you choose, being armed with some bookkeeping knowledge is never a bad thing.
