The basics of accounting for medical practices
Here are some best practices for setting up your business accounting and maintaining profitability.
Choose the right accounting method
There are two types of accounting that your medical group can use to track revenues and expenses: accrual accounting or cash-basis accounting.
With cash basis accounting, revenue is recognized when you receive payments, and expenses are recorded when you pay them. This method doesn’t use accounts receivable or accounts payable.
If you choose accrual basis accounting, on the other hand, you recognize revenues when you earn them and expenses when you incur them—even if the payments haven’t come in or gone out yet. In other words, you record income on your books when you provide services to patients, regardless of when the insurance company or other third party pays your invoice.
Most healthcare providers use cash basis accounting to manage and track their financials. Not only is it easier to use than the accrual method, but it’s also the preferred method for reporting profits on income tax returns because the business can avoid paying taxes on revenue it hasn’t actually received yet.
Bench provides clients with a modified form of cash basis accounting by recording transactions when they hit your bank or credit card account. However, we can also make accrual adjustments like tracking accounts receivable and accounts payable with our specialized accounting add-on.
Determine how to distribute profits
If you have partners in your medical practice, you need to determine how to split income.
Your business’s operating agreement should address how you’ll share profits. There are three common ways to do this:
- Allocate profit equally. This works well when you and your partners do about the same amount of clinical work, bring in a similar amount of new business, and split administrative duties, including managing staff, charting, and paying bills, roughly 50/50.
- Pro-rata method. This bases partner compensation on production, with each partner’s percentage of profits reflecting the percentage of gross collections they bring in during the period.
- Corporate split. Under this method, each partner in the practice has two roles: a clinical role and an investor role. Each doctor or dentist receives a salary based on their clinical work. Once all the practice’s bills are paid, each partner splits the remaining profits equally.
Be sure you work with your attorney or CPA to create a plan that works for your practice and your partners.
Leverage medical billing software or services
Medical billing is a crucial part of running a successful medical practice, and it can have costly consequences if you don’t handle it correctly.
According to the Medical Group Management Association (MGMA), the following steps can help ensure you collect reimbursement for the services you provide:
- Collect patient information at the time of service. Gather as much information as you can, including their name, address, Social Security number, phone number, and insurance information.
- Have the patient sign an assignment of benefits statement. This document assigns payment under the patient’s insurance plan to your practice. Without a proper AOB on file, you may have to send the bill for your services to the patient rather than their insurance company, Medicare, or Medicaid.
Whether you invest in medical billing software to handle your billing in-house or use a third-party billing service, following proper billing procedures can help you code services, submit claims, and increase collections.
Review financial statements regularly
Your practice’s financial statements provide insight into its financial health. Reviewing your balance sheet, income statement, and statement of cash flows each month can help you keep tabs on your current cash position, receivables, payables, liabilities, revenues, and expenses.
Many healthcare professionals only look at their financial statements once a year when their accounting firm requests financial data for tax preparation.
Reviewing your medical office financial statements more often—preferably every month—helps you stay on top of cash flow and profitability. It also gives you a chance to correct issues before they become problems and measure your progress toward financial goals.
Get professional help from a local CPA for your medical practice
Many health care providers try to handle their books on their own using QuickBooks or another DIYaccounting software solution. While this is less expensive than hiring a CPA firm, it often costs more in the long term. Physicians usually aren’t accounting experts, and it’s easy to make a mess of your books and overlook tax planning strategies that can save you money.
It’s important to hire a professional CPA or accountant when you need the help. The initial cost might seem high, but the benefits of better long-term financial management and planning will far outweigh the cost.
Common healthcare accounting mistakes to avoid
When you started your medical practice, you likely took on far more responsibility than you imagined. Not only are you responsible for providing patient care, but you’re also the accountant, marketing manager, human resources manager, and more.
When you’re ready to take some of those responsibilities off your plate, accounting and bookkeeping should be your top priority. Here are some common mistakes that arise when you don’t handle your medical accounting correctly.
Bookkeeping is put on the back burner
As the owner of a medical practice, you’re buried in responsibilities. So it’s no surprise that bookkeeping falls to the bottom of your to-do list. Unfortunately, this often leads to inaccurate books and overspending.
Without real-time financial data, you don’t know what you’re spending each month, whether or not the practice is profitable, or whether you have enough cash in the bank to make payroll, loan payments, or cover other expenses.
If tracking your finances daily isn’t high on your list of priorities, consider outsourcing your bookkeeping to a service like Bench. Bench offers online accounting services for small business owners who’d rather spend time growing their business than managing the books each month. Our trained bookkeepers can help keep your medical practice on track. We can also help with tax filing.
Cash flow suffers
Staying on top of accounts receivable is crucial for maintaining a healthy cash flow in your practice. If patients aren’t paying you for your services, you won’t have enough cash to pay employees, cover other expenses, and take home profits.
In addition to working with a skilled medical billing team to speed up collections, work with your accountant or bookkeeper to prepare cash flow forecasts. This will help you spot potential cash shortages before they happen so you can make a plan to trim expenses, ramp up collections, or tap a business line of credit.
There are also processes you can put into place that will help you get paid faster.
Skipping bank account reconciliations
Another often-overlooked aspect of medical practice management is reconciling bank and credit card accounts.
This process involves matching transactions recorded in your records to the information on your bank or credit card statement. If you see a charge for cotton swabs, for example, that you don’t recognize, or a payment for an outpatient procedure you didn’t expect, you can investigate and ensure it’s legitimate.
While this might seem like a mundane administrative task, it’s crucial for preventing and detecting fraud and errors.
Regular reconciliations will allow you to handle anything unusual immediately before it leads to bounced checks or negative cash flow.
Commingling business and personal expenses
Too often, doctors and dentists use their practice as a personal checkbook, running car leases, family vacations and other personal expenses through the practice.
Not only can this stress relationships with business partners, but it can also put you in danger of an IRS audit and make it difficult to get a business loan or line of credit.
Make sure you have a separate business bank account and business credit card for the practice, and keep all business and personal expenses separate.
The bottom line
Now you have the basics to get your medical practice bookkeeping off to a good start. Whether you handle bookkeeping and medical billing on your own or outsource it to a professional, make sure you’re giving it the attention it deserves. When you stay on top of your books, you’ll have real-time insight into your practice’s finances and the information you need to make more informed business decisions.