Owning your own medical practice is an exciting prospect, but it comes with additional accounting responsibilities. While you’d probably prefer to focus on providing healthcare services to your patients, you can’t afford to ignore the business side of your operation. Here’s what you should know about medical practice accounting to keep your financial systems running smoothly, including the unique challenges involved, some best practices to implement, and the most common mistakes to avoid. How Is Accounting For Medical Practices Different? The many years you spent in medical school were highly effective at preparing you to assist your patients. Unfortunately, they probably didn’t do as good a job of teaching you how to be a business owner. As a result, healthcare professionals are often unprepared to manage their company’s accounting and tax responsibilities. To make matters worse, the unique nature of the healthcare industry creates financial issues beyond what most business owners face. Generally, the most significant medical practice accounting challenges stem from the healthcare billing process. Most businesses provide a product or service to a customer, then receive a predictable payment from them in exchange. Unfortunately, medical practices provide services to their patients but have to coordinate payment between them and their insurance companies. There are many more moving parts than usual, and it’s much easier for things to go wrong. For example, medical coders make mistakes, patients fail to pay their bills, and insurance companies reject claims. As a result, medical practices must establish even more efficient systems for tracking and organizing data. Best Accounting Practices For Medical Practices As a healthcare provider, you probably want to focus on serving your patients and spend as little time as possible worrying about the financial health of your business. An efficient accounting system is essential for doing so without harming your practice. Here are some best practices you can implement to optimize your accounting function and minimize the time you have to spend managing it. Leverage Cloud-Based Software The sheer complexity of medical practice accounting makes software essential for healthcare providers. It’s prohibitively difficult and time-consuming to keep track of everything by hand. Fortunately, modern cloud-based software solutions can automate many of the most time-consuming aspects. That noticeably reduces the strain on your administrative staff with bookkeeping and accounting responsibilities. Businesses often need to invest in multiple tools, but healthcare providers can meet most of their needs with practice management solutions (PMS). For example, they can usually facilitate processes like the following: Scheduling appointments Capturing patient details Storing treatment plans Billing patients and insurers Insurance claim scrubbing You may still need to acquire a few tools for whatever your PMS can’t help you with, such as accounting and payroll services. Before committing to any products, make sure you’ve chosen ones that can interface with each other seamlessly. Use The Accrual Accounting Basis Businesses generally have to choose between the cash and accrual accounting methods. Neither is inherently superior, but the accrual basis is generally better suited to medical practices. The cash basis of accounting involves recognizing revenues when you receive them and expenses when you pay them. Meanwhile, the accrual basis recognizes revenues when you earn them and expenses when you incur them. The cash basis is easier to implement, but it generates financial statements that poorly represent a medical practice’s profitability. Doctors often provide services and go without the corresponding revenues for months, if they ever receive them at all. As a result, the accrual basis is much better at matching revenues with expenses and accurately representing your business's financial situation. However, it makes cash flow monitoring harder, so remember to track that separately. Invest In Financial Education One of the reasons healthcare providers often struggle to run their practices' accounting effectively is that business management is well outside their expertise. Fortunately, you can remedy that by investing in your own financial education. Finance, accounting, and tax strategies aren’t the most exciting topics for most medical practitioners, but you don’t have to become a master. You usually only need to know enough to hire and manage people who run those functions. Once you have an administrative staff in place, it’s a good idea to invest in their financial education as well. The more knowledgeable and reliable they are, the less that business will interfere with your day-to-day routine. Delegate As Much As Possible Providing medical services to your patients is more than enough work to occupy all of your working hours. It’s also the aspect of your business where your time generates the highest return, not to mention the one you probably enjoy the most. As a result, delegating will benefit you even more than most business owners. Embrace the fact that you’re going to need help managing your medical practice accounting responsibilities, and don’t be afraid to pay for assistance. Of course, labor is expensive, and you shouldn’t waste money unnecessarily. Fortunately, you don’t need to hire full-time workers for all your accounting functions. For example, an in-house bookkeeper might make sense, but you’re probably better off using an outsourced accounting service for your more sophisticated financial needs. A Certified Public Accountant (CPA) firm can provide all of the medical practice accounting services you need for a fraction of the cost, including proactive tax planning strategy, new business advisory, and business tax preparation services. Common Mistakes Healthcare providers rarely study business management during higher education. As a result, it’s easy for new practice owners to make mistakes as they transition into business ownership. Here are some of the most common errors physicians make that you should know to avoid. Lack Of Organization Accounting for medical practices involves many more moving parts than accounting for most other businesses. As a result, it’s more important than usual that you set up systems to keep everything organized and running smoothly as soon as possible. Here are some of the most effective steps you can take: Separate personal and business accounts: Using the same bank accounts for your business and personal activities forces you to go back and split the two later. Separate them from the beginning to save yourself the trouble. Customize your chart of accounts: Medical practices have nuanced revenues, expenses, assets, and liabilities. Creating particular accounts in your accounting software helps keep your bookkeeping accurate and actionable. Keep track of your asset purchases: Medical practices need expensive equipment to run. Unfortunately, you need to capitalize and depreciate these costs instead of deducting them immediately, so keep separate records for them. Whatever you can do to optimize your accounting from the start will pay dividends indefinitely, so be as diligent as much as possible from day one. Preventing accounting problems from occurring is much more effective than fixing them later. Neglecting Financial Analysis Healthcare providers can benefit significantly from automating and delegating significant portions of their accounting. However, that doesn’t mean you can ignore your medical practice’s finances. Patient care can be your main priority, but your medical practice is also a business. As a result, you need to take the time to review your financial statements and reports to draw conclusions that can inform your business decisions. For example, variable analysis is one great way to identify extraneous expenses and improve your overall profitability. It involves creating budgets for your expected costs, comparing them to your actual numbers, and investigating the differences. While you can pay an accounting firm for help with a lot of this, you can't give up the financial controls altogether. You need to know enough to understand and assess any management solutions they suggest. Choosing A Generic Accounting Advisor While the same fundamental accounting principles apply to every business in the United States, the nature of the healthcare industry presents some unique issues. As a result, it’s usually a mistake to settle for a generic CPA’s medical practice accounting services. The average CPA firm can handle basic small business accounting and tax services. However, if they’ve never worked with a busy medical practice before, they may not be able to develop effective medical practice accounting solutions. When you’re looking through accountant websites, make sure you select providers who demonstrate a clear understanding of healthcare accounting challenges. Use the free consultation and ask each one how they deal with insurance and medical billing issues. Here For Your Funding Needs As you're growing and expanding your medical practice, you'll likely need access to additional capital. Lendio can help match you with the right lender for your medical practice loan.