Do I need professional accounting services for my medical practice?
In this blog, we break down five critical elements within professional accounting services for a medical practice, and why hiring experts can save your practice time and money.
Here’s a hard truth about opening a private practice: the education and expertise doctors gain during years of medical training does not always translate into the skills needed to run a successful business.
There are few better examples than accounting. While most doctors are certainly capable of handling their finances, the tedious tasks involved in medical accounting take them away from more important aspects of a practice that demand attention. That is especially true if you are the primary revenue engine. The simple truth is that medical professionals aren’t professional accounting specialists, nor should they be.
Knowing when to forgo DIY solutions and hire professionals is an important part of managing a practice. When it comes to professional accounting services—or real estate or legal work, for that matter—most doctors are well served to put themselves in the hands of experts.
The success of a new business can often be boiled down to two major variables: money and time. How these resources get allocated can define your experience in private practice. Often, business owners fixate on money. “If I do it myself, I’ll save X” is a common refrain among hungry entrepreneurs. Yet in truth, your time is often worth far more than any savings that are realized.
Again, accounting is a good example. Many business owners forgo hiring an accounting professional in favor of apps or off-the-shelf software solutions. Some even go as far as to hire an office manager, which while great for day-to-day solutions, without the proper training cannot provide professional accounting services. More often than not, this results in many hours of lost time, a lack of in-house expertise, bookkeeping that falls behind, and very little in the way of cost savings.
Controlling Risk and ‘Resource Leaks’
Poor accounting increases risk, whether that means lost revenue opportunities or triggering a federal tax audit. This is true for any business, but it is particularly so for a medical practice, where unique billing systems are both complicated and highly regulated. Shaky accounting makes room for errors that could cost your practice exorbitant amounts of money, especially if you aren’t outsourcing your medical billing to a third-party provider. Late payroll, surprise deficits, missing cash flow and audits are all possible risks.
Even simple lapsed bookkeeping can have negative consequences. Dated books can be incredibly difficult to catch up on because the day-to-day tumult of running a practice leaves little spare time. The result is a “resource leak” that grows ever deeper. A resource leak is a lapse in efficiency that costs your company either money or time. In the case of poor accounting, leaks can cost you both.
Resource leaks come in many different forms across all industries, but the most dangerous are those that get bigger as they sit unaddressed. The longer a medical practice’s books fall behind, the longer it will take to clean them up, meaning more time or money has to be spent to do so. What started as an opportunity to save money instead leads to additional costs.
Luckily, there are solutions that every practice can implement, regardless of your experience in the field of finance. You can hire bookkeeping, accounting, and tax specialists who keep your practice legal, compliant, optimized, and running smoothly. To hire the right accounting professionals, it helps to understand basic bookkeeping and accounting functions that business owners must address, so you can make an informed decision about what is best for your practice.
Functions of Accounting
Let’s break down the specific functions of bookkeeping, because this encompasses a lot of key accounting functions and transaction cycles that doctors will encounter.
Accounts Receivable and Accounts Payable
Accounts Receivable involves tracking sales invoices and customer balances, and reviewing revenue and collections. Accounts Payable is effectively the inverse, tracking and managing expenses and managing cash flow. These two functions are the basis of most accounting work, and it’s critical that they are done properly. Otherwise, the financial accuracy of a medical practice will drop, leading to misinterpreted cash flow, late payments and the risk of audit.
Accruals and Prepayments
The accounting basis of a medical practice can be “cash,” in which income and expenses are booked when they are received or paid, or “accrual,” which records income and expenditures when incurred. For example, you may receive an annual invoice for insurance costs on January 1st covering the full year. To ensure we recognize these expenses when they are incurred, under accrual-basis accounting, we would spread these costs across the year via prepaid expenses, recording an expense each month.
Financial reporting is a broad field in finance but can be tailored to a practice’s needs. This may come in the form of a full monthly close and financial statements; quarterly board packs; reporting tailored to specific needs, such as monthly reports tracking services that bring in the most revenue; or just annual financial statements, compliant with Generally Accepted Accounting Principles. Working with a Certified Public Accountant (CPA) can be beneficial, particularly for annual reporting, financial statements and the audit process. It’s important to note, however, that CPAs tend to focus narrowly on tax preparation. This is unlike an accounting advisory firm, which is going to take a more granular approach to your business. But you don’t have to choose. You can work with both. The two differing perspectives provide a more holistic view of the financial health of your practice.
The purpose of payroll accounting is to track all the costs associated with your staff. Generally, these are related to taxes and other withholding, but they can also include benefit payments or deductions. Many accountants can help with the preparation of payroll; however, most practices are now using a payroll provider, such as ADP, for this function.
Budgeting and Forecasting
In a larger company, these functions are often performed by a chief financial officer, but smaller companies sometimes use accounting advisory firms to provide in-depth financial analysis. Both budgeting and forecasting are key for a practice to understand business performance, prospects and planning for the future. Using tools such as cash flow analysis and market knowledge, an accountant can develop a budget and a plan for your practice.
Of course, there are many other accounting functions, such as auditing or financial valuation, but most doctors entering practice can focus on the basics. The idea is to understand enough to hire the right team and keep your practice on track.
What to Look For in Professional Accounting Services
There are many factors to consider when selecting an accountant. Naturally, as a bookkeeping and accounting advisory company, we frequently go through the process of hiring accountants to provide service for our clients. Here are the top factors we consider when looking for accounting services.
Physical location used to be a major priority, but this has changed with the advent of digital banking and the shift to remote work. The need for in-person accounting work has diminished, and a majority of the work done by accountants can now be done digitally. What is important now is that your accountant understands the specific software you use for accounting. A company using a large-scale Enterprise Resource Planning (ERP) system like Netsuite needs to work with a firm that has a deep understanding of that specific software. Without it, the practice could be exposed to risk from internal errors that come with using an unfamiliar program. If you are already using a system, find accounting pros who understand that software. If you are not, talk to the firms you interview about the software they use and why they use it.
A question to ask yourself while searching is what kinds of certifications you want your advisors to have. The most common is a CPA and most firms will have at least one on the payroll, either in-house or external. Others include Certified Bookkeepers and Certified Financial Planners, though there are many other available certifications that may apply to different industries. For example, the construction industry has one of the highest audit rates in the nation, so accountants with a Financial Services Audit Certificate (FSAC) are often a priority for those companies. At launch, most medical practices can stick with the basics. Make sure the firm you use has certified personnel. When it comes time to sell, you may want someone Accredited in Business Valuation (ABV), but you can think about that later.
Another consideration is finding a firm to approach your finances from a holistic perspective. This is where hiring a pure CPA can get tricky, as CPAs tend to apply a more narrow lens to your financial health, focusing on the end-of-year taxes. Finding a firm that keeps you out of audit danger and also provides the resources to obtain a broader view of your financial health is important. Look for firms that can offer CFO services and integration specialty. These are both indicators that members of the team review finances with a more scrupulous eye, and also have the technological background to streamline your digital bookkeeping and save you money by increasing efficiency.
Lastly, consider the partnerships an accounting firm has with other financial professionals. While a one-size-fits-all approach would make things easy, the reality is it’s not that simple. Your practice’s financial health is not reflective of your own financial health, and accounting advisory firms with connections to financial planners, wealth managers, and business specialists can streamline the process of turning your practice into a vehicle for retirement. A firm that has taken the time to develop relationships with other companies in this space shows goodwill and an interest in their client’s overall well-being. That’s who you want to handle your business.
Looking for accounting support for your medical practice? Let’s chat.
This story is part of a series in conjunction with Nitra Visa Business Card Company.