Medical Practice Accounting: A Guide for Owners

Billed is not collected

Charges billed to patients and insurers are not income you can spend. Track gross charges, contractual adjustments, and actual collections separately.

A practice may bill one amount, but contracts with payers allow only a smaller amount. The difference is an adjustment. Revenue on your books should reflect what you expect to collect, not the full charge. Mixing these inflates your picture of the practice.

Three numbers to see each month: gross charges, net collectible revenue and cash collected. If cash collected lags net revenue for several months, your receivables are growing, and your cash is tied up. Our guide to cash vs. accrual accounting explains why many practices use accrual books for management and cash for taxes only if their accountant confirms it fits.

The key reports to review monthly

Review the income statement, balance sheet, cash flow statement, accounts receivable aging and a collections report by payer.

• Income statement. Revenue less expenses for the period. See the income statement explained.
• Balance sheet. Assets, liabilities and equity.
• Cash flow statement. What actually came in and went out.
• A/R aging. Claims grouped by how long they have been unpaid: 0-30, 31-60, 61-90 and over 90 days.
• Payer mix. Which payers pay quickly, which pay slowly or deny often.

The aging report is the most important. Claims over 90 days are harder to collect, so the earlier you chase, the more you keep.

Overhead and the numbers that tell you if the practice is healthy

Track overhead as a percentage of collections, and watch payroll, rent, supplies and malpractice insurance. Compare to your own history first.

Illustrative example: collections are $100,000 in a month. Staff payroll is $32,000, rent $9,000, supplies $8,000, malpractice and other insurance $4,000, billing and software $5,000, and other costs $10,000. Overhead is $68,000, or 68 percent of collections, leaving $32,000 before owner pay and debt payments.

Ratios are only useful as trends. If overhead drifts up three months in a row, find the line responsible. Also track days in accounts receivable, denial rate and collection rate. Benchmarks vary by specialty, so ask your accountant or specialty association for comparisons rather than relying on generic figures.

Payroll, owner pay and compliance

Medical payroll is complex: clinicians, staff, bonuses and benefits. Keep payroll tax deposits current and separate owner pay from practice funds.

Use a payroll service and reconcile it to your books every pay period. Decide how owners are paid: salary, distributions or both, depending on entity type. Late payroll taxes can bring penalties, so treat them as a priority obligation.

Patient data privacy rules also affect which accounting and billing tools you use. Make sure any software vendor that touches patient information meets the relevant requirements, and ask your attorney or compliance advisor when in doubt. For general habits, see our small business accounting overview.

Capital purchases and when to finance them

Equipment such as imaging, lab or treatment devices is a capital purchase. Financing can spread the cost across its useful life and protect operating cash.

Record purchases as assets and depreciate them over time per your accountant's guidance. Tax rules on depreciation and expensing change, so confirm current treatment with a professional. Before buying, estimate the revenue the device will add per month and compare it to the payment. If a $120,000 device adds $6,000 in net monthly profit and financing costs $2,800 a month, the purchase pays for itself with room to spare. If it adds less than the payment, wait.

When a practice needs outside funding

Typical needs are covering claim delays, buying equipment, adding providers and opening a second site. Match the product to the need.

For slow-paying claims, a business line of credit lets you draw as needed. For devices, equipment financing follows the asset. For expansion, a term loan or SBA loan may fit. See our pages on medical practice funding and the guide to medical practice loans.

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ in monthly revenue. Clean books and three months of bank statements make a complete file, which can be funded the same business day when approved.