Operating a medical practice goes beyond just providing good medical services. Physicians and medical practice owners have to deal with many more activities like processing payrolls, paying for insurance claims, handling medical equipment, dealing with vendors, paying taxes, handling the operational costs, and doing accounting. However, without a proper accounting system for medical practices, the above tasks will be very hard to handle, and this could adversely impact the practice’s finances and decision-making process.
In this blog, we discuss six accounting for medical practices best practices that can assist physicians and owners of healthcare practices in putting in place better financial controls within their practices. From selection of proper accounting systems, segregation of business and personal funds, reconciliation of accounts, tax planning, outsourcing of bookkeeping, and profit distribution plan; all the above tasks can result in a well-organized medical practice.
1. Choose the Right Accounting Method for Your Medical Practice
The accounting system that a medical practice adopts influences the timing of revenue and expense recognition within the financial books. There are two accounting systems mostly used; cash-basis and accrual-basis accounting systems, both offering varying perspectives about the practice's financial status.
Cash-basis accounting system recognizes income upon receipt of payment and expenses upon disbursements. This may be easy to maintain for some small medical practices as it offers a clear perspective of actual cash transactions.
Accrual-basis accounting system recognizes income upon earnings and expenses upon occurrence, despite whether cash transactions occur or not. Accrual-basis gives a full insight into receivables and payables of the business but it may need more elaborate bookkeeping.
Medical practice owners must not base their choice of the accounting system on mere convenience. The choice of the right accounting system depends on various factors like the business structure, taxation needs, size, among others. It would be advisable for a medical practice owner to consult a professional accountant.
2. Keep Personal and Business Finances Completely Separate
This blending may make it hard to evaluate how profitable the practice is. This is not only confusing but may also create unnecessary problems when preparing financial statements, analyzing expenses, preparing taxes, or even knowing what transactions should be counted for the practice.
Business owners need to have separate bank accounts and business credit cards where all business transactions are processed. Income from patients, income from insurance companies, expenses incurred from vendors, payroll and other business expenses need to pass through the respective business accounts.
The benefits are that the financial records will become cleaner since when business transactions are separated from personal transactions, an accountant will be able to reconcile the accounts easily and also determine real business expenses.
Medical practices need to come up with procedures to compensate their owners and distribute profits. An owner does not just pay his own expenses from practice accounts but needs to go through an approved procedure to get salary, draw, reimbursement, or distribution of profits.
3. Reconcile Accounts and Maintain Accurate Financial Records
Proper bookkeeping will help you get a grasp on the financial standing of your medical practice. As your practice may be receiving money from various people such as patients, insurance companies, as well as paying salaries, utilities, technology, supplies, and other costs, financial statements can get out of hand quite quickly without proper review.
Checking bank and credit card statements against transactions in your accounting software allows you to find any missed transactions, duplicates, mistakes, outstanding payments, or even fraudulent charges.
Regular reconciliation should be set up for medical practices rather than waiting until tax season arrives. Monthly reconciliation works quite well for many practices, whereas higher transaction volume practices might have to do it more often.
Financial statements will become more valuable when there are proper record keeping and transactions that are being reconciled. As a result, the owners of the practice will get a better picture of their finances, allowing them to evaluate revenues, expenses, profit, cash flow, and outstanding payments. This will help them make decisions about hiring employees, purchasing new equipment, or making other investments.
4. Plan for Taxes Throughout the Year
Year-round tax planning is advisable rather than just focusing on tax planning for the weeks preceding the filing of the taxes.
These business eligible expenses may include medical supplies, medical equipment, office expenses, salary payments, rent, professional services, insurance premiums, and any other ordinary and necessary business expense in running the medical practice. Adequate documentation is important when claiming these expenses and preparing the tax record.
It is also advisable to consider areas like retirement contributions, depreciation, and applicable tax credits among other areas that one might want to take advantage of. Availability and application of these areas will depend on whether the practice is organized as a sole proprietorship, partnership, S-corporation, C-corporation, etc.
Yearly tax planning will be helpful in managing the cash flow in the medical practice. This is because tax planning will allow the owner of the practice to estimate tax liability during the year instead of finding oneself with unexpected tax liability when filing the tax returns.
5. Outsource Accounting and Bookkeeping When Appropriate
Doctors have many obligations that go way beyond their consultation with patients. Employee management, scheduling, compliance, insurance issues, vendor issues, and operational issues will eat up most of the time and prevent one from doing in-depth bookkeeping and accounting.
One can outsource some of his or her accounting activities and allow professionals to do the accounting jobs on a regular basis. Depending on the nature of outsourcing, a firm that will be outsourced might help the doctor in recording transactions, reconciliation, accounts payable, financial statements, bookkeeping, and many more financial tasks.
One does not necessarily need to outsource because he or she wants to free himself or herself from administrative work. One should be able to get financial data from outsourced accountants on time to be able to know what is going on with his or her money.
6. Establish a Clear Profit Distribution Plan for Partners
It is important for medical practices with many owners to have a clear method for profit distribution. Otherwise, there will be disagreements regarding which basis will be used: ownership basis, production basis, administrative basis, etc.
Each medical practice may apply its own way of profit distribution. Some partners may decide to distribute profits evenly, some – based on ownership, others – according to production and other factors. The right form is decided by the type of the operation agreement, legal entity, pay system, etc.
The profit distribution method should be set in writing; it should not depend on various decisions made all over the year by the partners. Partners should seek help from professional offshore accountants and lawyers when setting up such an arrangement.
The right documentation will make compensation and distribution of profits more predictable, and it will minimize conflicts between partners. It will allow partners to assess the situation in the practice and make decisions concerning further investments in equipment, staff, etc.
|
Best practice |
Key financial benefit |
|
Choose the right accounting method |
Creates appropriate financial reporting |
|
Separate personal and business finances |
Improves transaction clarity |
|
Reconcile accounts regularly |
Helps identify errors and discrepancies |
|
Plan taxes year-round |
Improves tax and cash-flow planning |
|
Outsource accounting when appropriate |
Reduces administrative workload |
|
Document profit distribution policies |
Improves transparency among partners |
Efficient financial management is a key aspect in the management of a flourishing medical practice. Selecting the right accounting system, differentiating between personal and professional finance, account reconciliation, and record keeping can assist the physicians in getting a better understanding of the financial status of their medical practice. Yearly tax planning can be another tool that helps practices prepare themselves financially and discover valid means of managing their tax situation.
Once a medical practice expands, it becomes possible to outsource accounting and bookkeeping in order to receive extra help in finance without having to deal with all financial issues personally. With good record keeping, well-established procedures, and financial policy, the owners of a medical practice are free from spending much time on accounting activities.
The Fino Partners provides outsourced accounting, bookkeeping, tax preparation, payroll, and financial support to help businesses maintain accurate records and efficient financial workflows. Contact The Fino Partners to explore accounting support tailored to your medical practice.
