Most physicians are excellent at running the clinical side of their practice.
The business side is another story.
That’s no knock on anyone. Medical school doesn’t teach revenue recognition or overhead ratios, after all. Having said that, the financial side of a private practice has a way of catching up with you, usually at the worst possible time.
A handful of accounting issues come up in physician practices again and again. Some cost a few hundred dollars, while others cost tens of thousands every year and go unnoticed for a long time.
Here are the ones I see most often, and what to do about each.
Running Personal and Practice Money Through the Same Account
This is the most basic issue. It’s still surprisingly common, especially with newer practices and locum tenens physicians who have recently set up their own entity.
When personal and business expenses share an account, your financial statements stop telling the truth. Your accountant has to guess which Costco run was for medical supplies and which was for your kitchen. Deductions get missed, and sometimes personal expenses get written off when they shouldn’t be, which creates its own problems with the IRS.
The fix is simple: Open a separate business checking account and a dedicated business credit card, and run every practice expense through them.
Connect those accounts to your accounting software so every transaction is captured automatically. Then, reconcile monthly.
If you pay for something personal from the business account by accident, record it as an owner’s draw right away instead of letting it sit in an expense category.
Relying on the Wrong Accounting Method (or Only One)
Cash basis accounting records revenue when money hits your bank account and expenses when you pay them. Accrual accounting records revenue when you bill for a service and expenses when you incur them.
Many small physician practices file taxes on the cash basis, and that’s often the right call. It keeps things simple, and it generally means you aren’t paying tax on money you haven’t collected yet.
The trouble starts when owners manage the practice using only one set of numbers. Accrual books can make a practice look very profitable because every claim you submit shows up as revenue. But a claim is NOT cash.
If insurance reimbursements are delayed or denied, that revenue figure is inflated. Cash basis books can hide the opposite problem: a large pile of unpaid claims sitting out there that nobody is chasing.
I recommend reviewing both. Compare your accrual revenue against what you collected over the same period. If those two numbers drift far apart, something in your revenue cycle needs attention.
Letting Accounts Receivable Age Without a Plan
Accounts receivable management is where I find the quickest wins. All too often, a practice shows strong billings on paper but is way behind on collections. Coding errors, missing medical documents, claim filing mistakes and slow follow-up on denials all add up.
In one situation, we discovered that a code the billing company was using got rejected by an insurance provider more often than not. Once the code was corrected, collections resumed and cash flow improved almost immediately.
Here are a few habits that will keep your receivables from getting away from you:
- Review an aging report every month. Pay special attention to anything past 90 days. The older a claim gets, the harder it is to collect. Many payers have timely filing limits that make late claims often unrecoverable.
- Compare billings against receipts. Ask your billing company for this report, or pull it from your medical billing software. It’s the fastest way to see whether what you bill is turning into cash.
- Keep a simple denial log. Track rejections by payer and by code so patterns jump out before they cost you months of revenue.
- Meet weekly with whoever owns billing. Whether that’s your office staff or an outside company, a short standing meeting keeps problems from piling up.
Not all billing companies are created equal, so review those reports closely during your first year with any new vendor. If you can improve collections by even 5 to 10%, you raise profits without seeing a single additional patient!
Losing Track of Overhead Costs
Overhead costs creep. A new hire here, a software subscription there, a bigger office because you plan to grow into it.
The number I watch most closely is payroll as a percentage of revenue. For most practices, once total payroll, including clinician compensation, climbs above roughly 70% of revenue, making money gets very difficult.
Before any new hire, map out:
- What that person will handle
- How many patients a new clinician can realistically see
- How long it will take them to cover their own cost
A short-term cash flow dip after a hire is normal. If it lasts longer than three to six months, it needs to be addressed.
Rent is the other big one. It’s a fixed cost that doesn’t care how many patients you saw this month, so be honest with yourself. Will the larger space bring in more revenue, or just give you a bigger waiting room?
Another warning sign is profit that shrinks while revenue grows. As practice operations expand, you naturally take on more staff, more apps and more systems. Some of that is necessary. But if your take-home keeps falling as the practice grows, your cost structure needs a hard look.
In group settings, provider-level profitability helps a lot here. Knowing what each provider brings in relative to what they cost tells you more than one bottom-line number will.
Ignoring Payer Mix and Payor Contracts
Many physicians sign payor contracts once and never look at them again. Meanwhile, payment rates and reimbursement models change, and some payers become slower or stingier than others.
A payer mix analysis shows where your revenue comes from and how much each payer pays for your most common codes.
Laid out side by side, the picture is often eye-opening. I once worked with a practice doing over $1.1 million in annual revenue that was losing money!
When we dug in, spending was mostly under control. The real problem was pricing. We revamped their fees, put more focus on private pay clients and dropped the insurance plans that didn’t pay above a set threshold.
We also restructured the administrative work. One admin took over the critical tasks, and a virtual assistant picked up the simpler ones. The following year, margins climbed above 12%.
That exact approach won’t fit every specialty. Still, every practice should review its payer contracts at least once a year. Look at rates for your top codes, timely filing limits, and the terms around payor audits and recoupments.
Payor contracting is a negotiation. If you come to the table with your own financial data, you’ll be in a stronger position.
Paying Yourself the Wrong Way
If your practice is taxed as an S corporation, how you pay yourself matters a great deal. The IRS requires owners who work in the business to take a reasonable salary through W-2 payroll.
Many physicians take this to mean they should run all of their compensation through payroll. That mistake can cost thousands, and often tens of thousands, of dollars.
Salary carries employment taxes of up to about 15.3% between the employer and employee portions, while distributions generally do not. The savings are largest on income below the Social Security wage base, since the Social Security portion stops at that annual cap and only the Medicare portion applies above it.
Once you’ve set a reasonable salary, taking the rest as distributions can produce meaningful savings. What counts as reasonable depends on:
- Your role
- Your hours
- What the practice earns
- What comparable physicians are paid
There’s no boilerplate answer. Anyone who gives you one without asking questions first isn’t doing you any favors!
Keep an eye on owner’s draws too. Money sitting in the account isn’t automatically profit. Loan proceeds, for example, are not income, and pulling them out for personal use can reduce your basis in the business and trigger tax liabilities later.
Missing Deductions That Belong to You
Owning a practice opens up deductions employed physicians simply don’t have.
Retirement plans are the big one. Many owners assume that because they contribute to a personal IRA, they can’t do more. Very often, they can, although income limits may affect how much of the IRA contribution is deductible.
On the business side, a Solo 401(k) (for owners without staff), SEP, safe harbor 401(k) or defined benefit plan can shelter a large portion of income.
Equipment is another. Under current federal law, 100% bonus depreciation is permanent for qualifying property acquired after January 19, 2025, and the Section 179 limits were raised substantially.
In most cases, that means the full cost of medical equipment, furniture and computers can be deducted in the year you place them in service. Because these purchases sit on the balance sheet as assets, owners often forget to factor them into quarterly estimated payments.
The qualified business income (QBI) deduction was also made permanent, though medical practices fall under the specified service rules, so income limits matter a great deal.
Other frequent misses include:
- Home office deduction
- Business travel from a qualifying home office to your practice or hospital rounds
- CME costs
- Professional journals
- Licensing fees
These aren’t difficult to spot if you have someone asking the right questions.
Treating Your Books as a Tax-Time Project
The biggest accounting issue of all is waiting until tax season to look at your numbers. By then, most outcomes are already locked in.
Review your profit and loss statement and balance sheet monthly, and run comparative reports against prior months and the same month last year. Pick three to five KPIs, such as profit margin, payroll as a percentage of revenue and days in accounts receivable, and track them consistently.
At some point, outsourcing accounting tasks makes more sense than juggling them in-house with an already stretched back office. Remember: a good accountant is an asset, not an expense!
The biggest savings come from frequent conversations throughout the year. That’s why, at Leichter CPA, every client gets access to a dedicated tax accountant. When you do sit down with your advisor, ask “What should I do next?” instead of only “What happened?” Always be forward looking!
The Bottom Line
If a few of these issues sounded familiar, you’re in good company. Most of the practices we work with came to us with at least one of them. Sometimes, a second set of eyes on your books is all it takes to spot where money is slipping through.
You can learn more about how we help physicians and healthcare practices. And if you have a question about your own numbers, reach out. We’re always happy to talk shop.