Comprehensive Guide to Accounting for Therapists: Streamline Your Practice's Finances
Introduction
Running a therapy practice can be incredibly rewarding, but it also comes with its own set of challenges, especially when it comes to managing finances. Accounting might not be your favorite part of the job, but it's crucial for keeping your practice running smoothly. In this guide, we’ll walk through essential accounting tips and tools to help you manage your finances like a pro. Let’s dive in!
Why Accounting Matters for Therapists
Many practice owners find accounting either boring or confusing, but understanding your finances is key to making informed decisions about your practice. Accurate financial records help you keep track of your income and expenses, ensure you’re paid on time, and plan for the future. Plus, having your finances in order makes tax season much less stressful.
Setting Up Your Accounting System
One of the first steps in managing your finances is setting up a solid accounting system. Here’s how to get started:
Separate Personal and Business Finances
Open a separate bank account and credit card for your practice. This makes it easier to track business expenses and ensures you don’t mix personal and professional finances. Imagine your finances as two different worlds; keeping them separate helps you see the real picture of your practice’s financial health.
Choosing the Right Accounting Software
Software like QuickBooks, Xero, or FreshBooks can simplify your accounting process. These tools help you track income, expenses, and generate financial reports. Think of these tools as your financial assistant that works 24/7 without taking a break.
Automated Excel P&L Template: Not ready to invest in a software solution yet? Download this Automated Profit & Loss Excel Template. In two steps (1. copy/paste bank data, 2. select a category for each transaction) you will be able to immediately see the profitability of your practice.
Learn how to set up QuickBooks Online: If you are ready to set up a QBO account and want a step-by-step guide, we’ve created this tutorial series with over 2 hours of content to guide you through the essentials of the set up, focusing on the particulars of a therapy practice.
Key Accounting Principles for Therapists
Understanding some basic accounting principles can make managing your finances much easier. Here are a few key concepts:
Assets, Liabilities, and Equity
Assets: Anything of value owned by your practice, such as cash, equipment, and furniture. These are the things that you own.
Liabilities: Debts your practice owes, like loans or credit card balances. These are things that you owe.
Equity: This is the difference between your assets and your liabilities, representing your net worth. It reflects your ownership stake in the business—what’s left over if you were to resolve your liabilities from your assets.
2. Income and Expenses
Income: Money earned from providing therapy services. This is your hard-earned revenue from helping clients.
Expenses: Costs incurred to run your practice, such as rent, utilities, and supplies. These are the costs you pay to keep your practice running smoothly.
Example: If you charge $175 per session and have 50 sessions a month, your gross income is $8,750. If your monthly expenses total $2,250, your net income is $6,500.
A very common accounting mistake for sole practitioners is to include their own draws to pay themselves as an expense. Unless you are on your practice’s payroll and are receiving a W2, compensation to yourself is a reduction of equity.
Of course, this needs to be accounted for when analyzing the cash flow of your practice, but technically paying yourself (also known as a draw or disbursement) is not a business expense.
3. Cash Flow Management
Keeping track of cash flow ensures you have enough money to cover your expenses. It’s essential to monitor how money flows in and out of your practice.
Real World Example: You want to know how much you can afford to pay yourself in the next few months.
Using the numbers from the example above, where your gross income is $8,750 and your monthly expenses total $2,250, your practice is generating a net income of $6,500 each month.
If you draw $5,000 to pay yourself, that will leave you with a positive cash flow of $1,500.
You can then let this accumulate to have a cushion if your income ever decreases or expenses increase, enabling you to cover for a shortfall or negative cash flow month without paying yourself less.
Managing Patient and Insurance Billing
Billing can be a complex part of running a therapy practice, especially when dealing with insurance companies. Here are some tips:
Timely Invoicing
Send invoices prior to each session to ensure timely payments. Communicate this requirement to your patients during the intake process so everyone is on the same page. Using software like SimplePractice (which is HIPAA compliant!) can automate this process. Timely invoicing is crucial for maintaining a positive cash flow.
2. Handling Insurance Claims
Make sure you understand the billing requirements of insurance companies and keep detailed records to avoid claim denials. Think of this as playing by the rules to ensure you get paid.
Example: If a session costs $120 and insurance covers 80%, you should bill the insurance company $96 and the patient $24.
3. Staying HIPAA Compliant
Use HIPAA-compliant software to protect patient information. Software like SimplePractice and TherapyNotes can help ensure you stay compliant. This is your shield against any data breaches or compliance issues.
Tax Considerations and Deductions
Taxes can be daunting, but knowing what deductions you can claim can save you a lot of money. Here are some common deductions for therapists:
Common Tax Deductions
Office rent, utilities, professional development, and even some travel expenses can be deductible. Think of these deductions as your reward for investing in your practice.
Example: If you spend $500 on a professional conference, you can deduct this amount, meaning you record it as an expense. This reduces your net income and ultimately the amount of income you are taxed on.
Related article: Simplifying Taxes: Must-Know Tax Deductions for Therapists in 2025
Keeping Detailed Records
Save all receipts and document expenses carefully. This will make tax time much easier and help you avoid any issues with the IRS. Consider it as building your defense against any tax troubles.
Paying Quarterly Taxes
As a self-employed therapist, you’ll likely need to pay estimated taxes quarterly. This helps you avoid a large tax bill at the end of the year. Think of this as chipping away at your tax burden four times throughout the year. A quick and dirty estimate is to pay 20% of your net income per quarter. If you’ve filed before, refer to the vouchers for estimating quarterly payments in the next year. You can also reference your effective tax rate from prior filings to help you get a more accurate estimate of quarterly tax liability.
Using Accounting Reports to Make Informed Decisions
Regularly reviewing financial reports helps you understand the financial health of your practice. Below are some key reports to consider. Looking at all three reports (not just your P&L!) is essential to getting a wholistic view of your practice’s financial health.
Balance Sheet
This report shows your assets, liabilities, and equity at a specific point in time. It helps you see the overall financial position of your practice. Think of it as a snapshot of your business’s health.
Profit and Loss Statement
This report summarizes your income and expenses over a period, showing your net profit or loss. It’s essential for understanding your profitability. Consider it your financial scoreboard.
Example: If your income for the month is $10,000 and expenses are $4,500, your profit is $5,500.
If you’re just getting started with financial statements, the Profit and Loss is typically the first report people get familiar with. Check out our automated profit and loss template in Excel to generate this for your practice without the need for software.
Cash Flow Statement
This report details the inflows and outflows of cash in your practice. It is often a stumper for those without an accounting background and is by far the most complex of the three financial statements. This is because it pulls information from the other two statements, and makes adjustments to determine where your money is going.
Example: Expanding on the example above, if you made a student loan principal payment of $500 (the interest of a loan is an expense, but the principal reduces the balance of the loan, which is a liability) and also paid yourself $4,000 as a disbursement, then your cash flow is actually $1,000, even though your net income (profit) is $5,500. This report explains the difference between how your bank balance has changed versus how profitable you were in any given period.
When to Hire an Accountant
At some point, it’s less stressful and wiser to leave the accounting to the professionals. Here are some signs it might be time to hire an accountant:
Lack of Time
If managing your finances takes too much time away from your clients, consider hiring help. Your time is valuable and should be spent where it matters most.
Complex Financial Situations
If you have employees, multiple revenue streams, or complex tax situations, a professional can help you navigate these challenges. Think of an accountant as your financial navigator.
Maximizing Tax Benefits
An accountant who specializes in therapy practices can help you identify all possible deductions and ensure you’re compliant with tax laws. They can help you uncover hidden financial opportunities.
Improving Your Cash Flow
If you are chasing payments and having insurance deny claims, this is not the best use of your time. And I am willing to bet it's also incredibly frustrating and stressful! A streamlined system for this keeps a steady flow of cash into your practice, enabling you to operate more efficiently.
Alternatively, if you manage a small caseload and enjoy doing and learning about the accounting involved, by all means, keep doing it! There are plenty of tools and free advice out there to aid you while you are starting out and managing on your own, which can also improve your cash flow (less money out the door) as long as you are confident in the accuracy of your record keeping.
Read the below case study on opportunity cost, which is a great gauge for when it’s right to hire someone, from a financial perspective but also in regard to your quality of life. Calculating your own financial opportunity cost is quite straightforward, so give this a read if you want to find out more.
Conclusion
Keeping your therapy practice’s finances in order might not be the most exciting part of your job, but it’s crucial for your success. By setting up a solid accounting system, understanding key financial principles, and knowing when to seek professional help, you can ensure your practice remains financially healthy. Remember, well-managed finances allow you to focus on what you do best—helping your clients.
If you have any questions or want to learn more about how we can support you, please don’t hesitate to contact us. Thanks for your time!
