The end of the year is a good time to look at what actually happened financially in your private practice. Maybe revenue increased, you hired your first employee, or your expenses were much higher than expected. Whatever changed, you want to understand the numbers before moving into another year.
Year-end financial planning goes beyond getting ready to file your taxes. It gives you a chance to review your profit, tax position, cash reserves, retirement contributions, payroll, and other financial decisions while there may still be time to make adjustments.
The goal is not to make a long list of last-minute financial moves. It is to understand where your practice stands, identify anything that needs attention, and start the next year with a clearer plan.
Review How Your Practice Performed This Year
Start with the numbers.
You should know how much your practice earned, how much it spent, and how much profit was left after expenses. Looking only at the balance in your business bank account will not give you the full picture.
Your financial statements can help you understand what happened throughout the year and where your money actually went.
Review Your Profit and Loss Statement
Your profit and loss statement is one of the best places to start. Look at your total revenue, operating expenses, and net profit for the year.
Then compare those numbers with the previous year. If revenue increased by 20% but expenses increased by 35%, for example, your practice may be growing without becoming more profitable.
Look closely at your largest expense categories. Payroll, rent, software, marketing, contractor costs, and professional fees can all grow gradually without getting much attention during the year.
The point is not simply to ask whether you made more money. Ask whether the practice became financially stronger.
Make Sure Your Books Are Up to Date
Year-end planning becomes much harder when your bookkeeping is several months behind.
Make sure your bank and credit card accounts have been reconciled. Review transactions that were placed in unclear categories, look for duplicate entries, and make sure business expenses have not accidentally ended up in personal accounts.
If you have been putting off your bookkeeping, now is the time to clean it up. Accurate books give your CPA better information for tax planning and give you a more reliable picture of how the practice actually performed.
If bookkeeping has become one of those tasks that constantly falls behind, our guide to bookkeeping for therapists explains how to create a cleaner system for your practice.
Review Your Tax Position Before the Year Ends
Do not wait until your tax return is prepared to find out where you stand.
Private practice income can change considerably from one year to the next. You may have increased your rates, added clinicians, lost a major expense, received more insurance reimbursements, or simply had a much more profitable year than expected.
All of those changes can affect your tax situation.
Federal income tax works on a pay-as-you-go system. Depending on how your practice is structured and how you pay yourself, taxes may be covered through withholding, estimated tax payments, or a combination of the two.
A year-end tax projection can help you compare your expected tax liability with what has already been paid or withheld. It can also give you time to discuss any remaining planning opportunities with your CPA.
Our guide to estimated taxes for therapists goes deeper into how we approach estimated tax planning for private practice owners.
Review Your Tax Deductions
Before the year closes, review the expenses your practice incurred throughout the year.
The IRS generally allows a business to deduct expenses that are ordinary and necessary for operating the business. An ordinary expense is common and accepted in the business, while a necessary expense is helpful and appropriate.
For a therapy practice, that may include expenses such as:
- Office rent
- Practice management software
- Telehealth platforms
- Malpractice insurance
- License renewal fees
- Qualifying continuing education
- Professional memberships
- Marketing expenses
- Business insurance
- Accounting and legal fees
- Payroll and eligible employee expenses
- Office supplies
- Business equipment
Go through your business accounts and look for expenses that may have been missed or categorized incorrectly. Also check purchases you made personally for the practice and discuss with your accountant how they should be recorded.
This review is about finding legitimate expenses that already exist. It is not an invitation to start spending money simply because December is approaching.
Beware of Tax-Driven Spending
Year-end tax planning sometimes creates a strange incentive.
You find out your practice made more money than expected, realize that your tax bill may also be higher, and suddenly start looking for things to buy.
A new computer sounds tempting. Maybe new office furniture would help. Perhaps you could prepay for something you were not planning to purchase for another six months.
The problem is that reducing your tax bill is not the same as saving money.
Why the Tax-Driven Mindset Can Be Costly
Imagine that you spend $1,000 on a new laptop because you want another business deduction.
For a simple illustration, assume the purchase ultimately produces a $300 tax benefit. You have still spent $1,000 to save $300.
You are $700 out of pocket compared with doing nothing.
That may be perfectly reasonable if you genuinely needed the laptop. If your current computer was failing and you planned to replace it soon anyway, making the purchase before year-end may fit both your business needs and your tax plan.
But buying something you do not need just to create a deduction is different.
The same thinking applies to furniture, software, equipment, marketing packages, training, and other year-end purchases. A deduction can reduce the after-tax cost of an expense, but it does not make the purchase free.
Start with what your practice actually needs.
Look at profitability, cash reserves, debt, planned growth, client experience, practice efficiency, and professional development. Then decide whether a purchase makes financial sense on its own.
If a planned expense also creates a legitimate tax benefit, great. The tax benefit should support the decision rather than create it.
Review Your Retirement Plan
Year-end is also a good time to review your retirement strategy.
Private practice owners may have access to several retirement plan options depending on their business structure, employees, income, and other circumstances. These can include SEP IRAs, SIMPLE IRAs, solo 401(k)s, and plans designed for businesses with employees.
Start by asking whether you are taking full advantage of the plan you already have.
Did you make the contributions you intended to make this year? Has your income increased enough that your retirement savings strategy needs another look? If you now have employees, does that change the way your plan works or what the practice must contribute?
Deadlines also differ by plan and by the type of contribution being made. Some actions need to happen before year-end, while others may be completed after the year closes. That is why this conversation should happen with your CPA or retirement plan professional before assuming you can deal with everything at tax time.
Your retirement plan should also fit the practice you have now. A plan that worked when you were a solo therapist may not be the best fit after you build a group practice.
Review Payroll and How You Paid Yourself
If your practice runs payroll, year-end is a good time to make sure everything is in order.
Check employee wages, payroll tax deposits, benefit deductions, and employee information. If you paid bonuses or made other compensation changes, make sure they were processed and recorded correctly.
Practice owners should also review how they paid themselves during the year.
This is especially important for S corporation owners. Salary and distributions are treated differently, and your compensation decisions should be reviewed in the context of your actual business rather than based on an arbitrary number you found online.
If your practice had a particularly strong year or changed significantly, talk with your CPA about whether your current compensation setup still makes sense.
Year-end is much easier when those conversations happen before payroll has already been finalized.
Review Your Accounts Receivable
Revenue on paper does not always mean money in the bank.
If you accept insurance, you may have claims that are still outstanding at year-end. You may also have unpaid patient balances, older invoices, denied claims, or reimbursement issues that need attention.
Review what is still owed to the practice and separate recent receivables from balances that have been outstanding for months.
Follow up on insurance claims that have stalled. Review patient balances that need collection activity. Make sure contractual adjustments, refunds, and payer clawbacks have been entered correctly in your records.
Your accounting method also matters here. Cash-method taxpayers generally cannot take a bad-debt deduction for unpaid fees that were never previously included in income.
So do not assume that an unpaid $500 patient balance automatically gives you a $500 tax deduction.
The bigger reason to review receivables is cash flow. Money your practice has earned but has not collected cannot pay payroll, rent, or your own bills.
Check Your Cash Reserves
A profitable year can still leave a practice short on cash.
Maybe a large amount of your revenue is sitting in accounts receivable. Maybe you recently made several large purchases. Or perhaps the money in your business account includes funds you are mentally reserving for taxes.
Look at what your practice actually has available after upcoming obligations.
Consider expenses such as:
- Payroll
- Rent
- Tax payments
- Insurance
- Software renewals
- Contractor payments
- Retirement contributions
- Planned equipment purchases
You want enough cash available to manage normal fluctuations without needing to make financial decisions out of panic.
There is no single cash reserve amount that works for every private practice. A solo cash-pay therapist has a very different cost structure from a group practice with several employees and a large monthly payroll.
Your reserve should reflect the expenses and risks of your actual practice.
Review Your Debt
Debt deserves a place in the year-end conversation too.
Look at business credit cards, equipment financing, lines of credit, and any other practice debt. Pay particular attention to high-interest balances that are reducing your cash flow every month.
A strong year does not always mean extra money needs to be spent on new equipment or another business investment. Sometimes the better financial move is reducing expensive debt.
You should also understand why the debt exists.
Using a line of credit temporarily while waiting for a large insurance payment is different from relying on credit cards every month because operating expenses consistently exceed collections.
If debt keeps increasing, the underlying problem deserves more attention than the year-end balance itself.
Look at What Changed in Your Practice
Your financial plan should change when your practice changes.
Maybe you started the year as a solo therapist and now have three clinicians. Maybe you moved into a larger office, started accepting insurance, increased your fees, or added a new service.
Each of those changes can affect your expenses, cash flow, taxes, payroll, and financial goals.
Ask yourself what is different today compared with January.
If your practice has grown, your old financial systems may no longer be enough. The spreadsheet that worked when you had one bank account and a few monthly expenses may not make sense when you have payroll, contractors, retirement contributions, and insurance receivables.
Growth usually creates more financial complexity. Your accounting and planning should grow with it.
Build Next Year’s Financial Plan
Once you understand this year, start looking ahead.
You do not need a complicated 40-page financial forecast. You need a realistic idea of what you expect to earn, what you expect to spend, and what you want the practice to accomplish.
Start with revenue.
Think about your current caseload, fees, clinician capacity, insurance contracts, and any planned additions to the practice. Avoid building a budget around the most optimistic version of next year.
Then estimate your major expenses.
Include payroll, rent, software, marketing, insurance, professional fees, education, taxes, retirement contributions, and any major purchases you already know are coming.
Finally, identify the financial goals that matter most.
Maybe you want to increase your cash reserve. Maybe you want to hire another clinician, increase your retirement savings, pay off debt, move into a larger office, or simply take more money home without increasing your caseload.
Give those goals numbers and timelines.
“Improve cash flow” is vague.
“Build the practice reserve to three months of expected operating expenses by September” gives you something you can actually track.
Your Year-End Financial Planning Checklist
You do not need to overhaul every part of your practice before December 31.
But you should know where you stand.
Before you close out the year, review the following:
- Profit and loss statement
- Bank and credit card reconciliations
- Estimated tax position
- Business deductions
- Planned year-end purchases
- Retirement contributions
- Payroll records
- Owner compensation
- Accounts receivable
- Insurance reimbursements
- Cash reserves
- Business debt
- Next year's budget
- Major financial goals
If one of these areas raises a question, deal with it while you still have time to make an informed decision.
Plan Your Finances With Angelo & Associates
Year-end financial planning is much easier when your accountant understands how private practices actually operate.
At Angelo & Associates, we work with therapists and private practice owners on the financial issues that come up throughout the year, not just when a tax return is due. That includes tax planning, bookkeeping, payroll, practice growth, owner compensation, and the financial decisions that come with running a successful practice.
Working with a CPA who specializes in private practice owners can help you understand where your practice stands today and what needs attention before you move into another year.
If you want help reviewing your practice finances and building a plan for the year ahead, schedule a consultation with Angelo & Associates.