Getting Better at Private Practice

By Chris E. Stout

Expert advice for building your private practice

The "business" of practice as a mental health professional is a skill that is seldom taught in school and requires thoughtful guidance and professional mentorship from those who have already succeeded.

Containing the collective wisdom and secrets of many expert practitioners, this helpful resource provides useful insights for setting up, managing, and marketing your practice, including timely advice on being a successful provider in the digital age—from Internet marketing to building your online presence.

Designed for private practices of any size and at any stage of development, this practical guide looks at:

• Creating your dream niche practice
• Choosing the right technological tools and resources to simplify and streamline your job
• Leveraging the Internet to market your practice
• Developing a practice outside of managed care
• Transitioning to executive coaching
• Ethical and legal aspects of private practice

Full of action-oriented ideas, tips, and techniques, Getting Better at Private Practice provides both early career and seasoned mental health professionals with the knowledge and tools they need to establish, develop, and position their practice so that it is financially successful and life-enriching over the long term.

• Language: English
• Publisher: Wiley
• Release date: Oct 4, 2012
• ISBN: 9781118235058

Book preview

Section 1

Setting Up, Managing, and Marketing Your Practice

Chapter 1

Differences in Business Structures and Protections in Human Service Private Practice: Which Suits Your Practice Best?

Jonathan D. Nye

Whether you have already established your own practice, are starting a practice of your own, are joining a practice, or are working for a practice that is already established, the business of practice as a mental health or human services professional is the framework within which professional care is delivered. A successful practice requires the knowledge and implementation of basic legal, financial, and business management skills. We present here an overview of some legal aspects of practice structure to assist the practitioner in establishing, evaluating and improving the business of the practice.

The business of being a service provider includes such mundane activities as:

Securing, contracting for, and equipping adequate office space, telephone, Internet, and fax service; design and furnishings; and a secure filing system.

Development and implementation of legal and ethically based practice forms and policies.

Compliance with state and federal tax, licensing, and confidentiality law and practice.

Business accounting.

Marketing/practice development.

Staff acquisition, training, and supervision.

Policies, procedures, and implementation of day-to-day business activities such as calendaring, billing, and collections for services provided.

All of these business matters are affected in one way or another by the form of practice entity chosen for the firm. There are benefits, concerns, and obligations associated with each. Keep in mind that the laws of each state and its licensing bodies (departments of professional regulation) will differ in requirements, restrictions, and protections. These are highly complex matters and require professional consultation and assistance.

Choice of Business Entity: Protection Against Professional Liability Claims

One of the primary purposes of establishing a practice entity is to limit liability, or one’s financial exposure, for damages arising out of a wrongful act or omission by a professional or a dangerous condition on the premises.

Professional liability describes legal obligation arising out of a professional’s errors, acts, or omissions during the course of practicing his or her profession. Generally, if someone claims injury as a result of either intentional malfeasance or negligent deviation by a professional from the standard of care recognized by the profession (malpractice), the professional will be liable for such injury which, in the law, is characterized as damages.

Professional liability usually takes the form of a legal action alleging professional negligence or malpractice. Professional liability and discipline by licensing authorities and professional associations can occur when a professional negligently or deliberately deviates from the standard of care of a reasonable professional under the circumstances of the case. An example of a deliberate wrongful act might be a mental health provider engaging in a dual relationship with a patient or client, acting or failing to act in a professional manner, mismanages a transference or countertransference, or engages in undue familiarity with a client. This could range from engaging in a social relationship with a client to engaging in a sexual or business relationship with a client. In either case, the professional and, potentially, his or her partners, supervisors, employers, or others in the practice may be held liable, depending on the act or omission complained of as well as the business structure of the practice.

Premises liability can attach if someone is injured on the business premises property as a result of a hazardous condition, such as ice, snow, standing water, holes in the floor or pavement, insufficient lighting, or defects in furniture. Premises liability may be avoided or minimized by reasonable efforts to protect against harm, for example, signs, barriers, painting stairs yellow or orange, and otherwise warning of potentially dangerous conditions.

Business Structure for Professional Practices

The basic legal entities of business structure are sole proprietorship, partnership, corporation, and limited liability company (LLC). A major basis for choice among these is insulation for the practitioner against claims against the entity and other providers or employees in the practice. Note, however, that regardless of the type of practice entity, individual practitioners cannot escape liability for their own negligence or deliberate wrongful acts.

Apparent Agency

Although individuals may not be actual partners, stockholders of a corporate entity, or members of an LLC, if they represent to the world that they are in some way connected in practice, the law provides that they may be liable for a nonpartner’s negligent or intentional act that harms another. This apparent agency can be formed by poor planning in signage, information, and clarification of the independence of each professional working or having an office in a particular location. It is suggested that sole practitioners who share practice space make sure that clients and the world at large be informed that they are not partners but a group of independent professionals sharing space.

This chapter is meant to inform practitioners generally. Reading this chapter must not be considered to be in lieu of securing competent legal and financial advice and assistance from an attorney and an accountant licensed to practice in the state in which you will be practicing, with specialized experience or training in matters related to mental health and human services law, ethics, and practice.

This caveat having been stated, this chapter provides practitioners with an overview of the benefits and differences of practicing under the four primary distinct forms of the practice entity.

Sole Proprietorship

The oldest, most common, and simplest form of business organization is a sole proprietorship—a business entity owned and managed by one person. It is often organized very informally, is not subject to much federal or state regulation, and is relatively simple to manage and control. The owner and business are one entity, inseparable from each other. The owner has complete control over the business and its operations and is financially and legally responsible for all legal and ethical obligations of the business. Taxes on a sole proprietorship are determined at the personal income tax rate of the owner; a sole proprietorship does not pay taxes separately from the owner.

A sole proprietorship may be a good business organization for an individual starting a business that will remain small, does not have great exposure to liability, and does not justify the expenses of incorporating and ongoing corporate formalities.

Because there is one owner of the business practice, there are no formalities for creating a sole proprietorship, and it is the simplest form of business to create. The owner manages and controls the practice, may use all business profits, solely carries losses, and can generally deduct losses from other income for tax purposes. The owner may sell the practice assets in entirety or in part. The business does not file or pay taxes—all income is attributed to the owner, and all profits and losses of the practice are reported directly to the owner’s income tax return. On the downside, the owner could spend unlimited amount of time responding to business needs, cutting into his or her availability for practice.

The owner faces unlimited personal liability for debts of or claims against the practice, and if he or she is the only professional practicing in the business, liability insurance is of limited or no help. Capital financing may be very difficult for sole proprietors. Except for his or her own capital or contributions by others, capital must obtained from the owner or through loans based on owner’s creditworthiness. Because a sole proprietorship is not a separate legal entity, it ordinarily terminates when the owner becomes disabled, retires, or dies. As a result, the sole proprietorship lacks continuity and does not have perpetual existence like other business organizations. However, a sole proprietorship is an asset (or liability if it is encumbered by debt or other claims against it), the value of which will be subject to division in the case of divorce of the owner, in accordance with state law. It may also pass to heirs on the death of the owner and sold to a member of the decedent’s profession.

Partnerships

General Partnership

A general partnership is an association of two or more persons to carry on as co-owners a business for profit [. . .]. In other words, if two or more individuals do nothing more than verbally agree to conduct business as owners, a general partnership is formed. Partnerships consist of relationships between two or more persons embodied in an agreement. Creation of the agreement establishes rights and duties between the partners and regulates their conduct as they transact business. The duration of a partnership and the transfer of ownership shares is determined by agreement of the partners or on occurrence of certain events identified by state law. While a general partnership may be created by a verbal agreement, it is customary and highly recommended that the partners define their rights and duties in a written agreement.

Sources of partnership law are many. Much of this law has been codified in state statutes. Even where no statutory filing is needed to form and operate a partnership, such statutes can also be useful references in developing a contract creating and defining the relationship between partners when the partnership agreement is silent on a particular topic.

There are few legal requirements to creating a partnership. Partners may pool their resources and talents. This allows all partners share control and participate equally in management of the partnership unless otherwise agreed upon by contract. A general partnership has flow-through taxation: The partnership entity does not pay taxes, but the individual partners are taxed on the income they receive from the partnership. All partners are jointly and severally liable for all obligations.

Profits, losses, and distributions are divided among partners in any manner they choose, consistent with the partnership agreement or, absent an agreement, according to state law. Under a general partnership, assets of any of the partners are vulnerable to the business liabilities regardless of which partner incurred the liability. Partners have unlimited personal liability in a partnership form of business—not only for their own actions, but also for the actions of their partners. Therefore, a written partnership agreement setting out the responsibilities of the partners to each other is extremely important. It is strongly recommended that the partnership agreement be prepared by an attorney who represents all of the proposed partners—one who has no loyalty to or interest in any one or group of potential partners.

Limited Partnerships

Some states permit limited partnerships. Since this is a fairly new concept, recourse must be had to local state law, and professional advice is extremely important. Formation of the entity requires filing of documents to the relevant state registration office and usually requires a written limited partnership agreement.

Generally, a limited partnership is an entity having one or more general partners and one or more limited partners. It is formed under state law by two or more persons or entities, subject to a state statute. A limited partnership is a separate entity distinct from its partners and must include both general partners and limited partners and provides both limited liability and partnership protections. As with a general partnership, the partnership agreement governs relations among the partners and between the partners and the partnership. A limited partnership may sue, be sued, defend in its own name, and maintain an action against a partner for harm caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership.

General partners have management control, share the profits pursuant to agreement, and have joint and several liability for partnership debts. As agents of the partnership, they have the authority to bind all the other partners in contracts with third parties that are in the general course of the firm’s business.

Limited partners have no management authority and unless they have been held out to others as agents of the firm, they have no inherent agency authority to bind it. Their individual liability for the firm’s debts is limited to the extent of their registered investment. They are paid a return on their investment, similar to a corporate dividend, as provided by the partnership agreement.

Corporations

The business corporation is the most complex form of business organization. A for-profit corporation is an association of individuals created by law with powers and liabilities independent of its stockholders. It is a legal person, an entity separate and distinct from the people who control, manage, and own it, and it is governed by its articles of incorporation and bylaws. As a separate legal entity, the corporation can do business, owns the corporate property, owes the corporate debt, and is the debtor that gets sued or the creditor or claimant who sues. The day-to-day management of a corporation is usually done through a board of directors and officers, who are usually elected by the corporation’s stockholders.

There are routine formalities a corporation must follow on pain of serious consequences, including denial to recognize the company as a corporation. These include adequate investment of money (capitalization) in the corporation, formal issuance of stocks to the initial shareholders, and upkeep and update of business records and transactions separate from those of the owners. Assuming the board of directors and shareholders comply with such corporate formalities as holding board meetings and paying franchise taxes and related obligations, a corporation largely insulates its shareholders from individual civil liability for acts and omissions of the business and its personnel. Stockholder status does not, however, insulate a professional from individual liability as an employee or contractor of a corporation. This reality requires that each professional have individual professional liability insurance or that, by contract, the corporation is required to maintain such on behalf of the professional.

With certain important exceptions, owners of a corporation have limited liability for corporate obligations—they are not personally liable for debts incurred by the corporation and cannot be sued individually for corporate wrongdoings. There are, however, circumstances under which this limited liability will not protect the owner’s personal assets, including a court ruling that the corporation ceases to exist as a result of failure to adhere to the corporate formalities.

A stockholder will be held personally liable if he or she treats the corporation as an extension of his or her personal property, rather than a separate entity; personally injures someone; has personally guaranteed a loan or a business debt for the corporation that the corporation fails to repay; fails to deposit taxes that have been deducted from the employee wages by the corporation; or is part of intentional fraud or other illegal action that results in loss to the corporation or someone else.

Corporations are formed under the provisions of each state’s business or professional corporations acts. The process of incorporation requires the filing of articles of incorporation, providing information to the state’s registration authority. The information ordinarily identities of the incorporators (the individuals who form the corporation); the number of shares and type of stock to be authorized and issued; the rights, duties, and financial obligations attributable to stock owners; the distribution of corporate assets should the corporation dissolve; the value attributed to the assets of the corporation; the names of the initial corporate directors and officers; and an agent to receive service of process in the event of a lawsuit or administrative action on behalf of the corporation.

Generally, there are two types of corporate structures. A closely held corporation is one in which there are a small number of shareholders who own the corporation’s shares, share transfer restrictions are likely, and the owners of the corporation are usually the board members and officers who also work for the corporation. A publicly held corporation, in contrast, has shareholders who are part of the general public, demand for the corporation’s shares is much broader, there are generally no share transfer restrictions, and shareholders are not exclusively board members and officers.

Business Corporations

Under the Internal Revenue Code, corporations may have a designation as a C corporation or an S corporation."

C Corporation

A C corporation is taxed separately from its owners. It is owned by shareholders, who must elect a board of directors that make business decisions and oversee policies. It must file its own income tax return and may have different rules in regard to depreciation of assets, payment of taxes, capital gains, and income and related tax matters. The profit of a C corporation is taxed to the corporation when earned, and then taxed to the shareholders when distributed as dividends. Thus, profits are double taxed. A C corporation cannot deduct dividends paid to shareholders but may deduct expenses such as payroll. Shareholders cannot deduct corporate losses. In most cases, a C corporation is required to report its financial operations to the state in which it is organized. As an independent legal entity, the corporation does not cease to exist when its owners or shareholders change or die.

S Corporation

A corporation that functions as a subchapter S corporation allows the shareholders the protection of limited liability, as well as some appealing tax benefits. One of the clearest benefits is that the owners of an S corporation pay taxes only once and through the shareholders’ individual income tax returns. With subchapter S status, a corporation may elect to have flow-through taxation as if it were a partnership—that is, income and losses are passed through to shareholders and included on their individual tax returns. As a result, there is only one level of federal tax to pay. The specific requirements and benefits of this tax designation should be discussed with your accountant or tax preparer. To elect S status, the corporation must do so no later than the 15th day of the third month of the tax year for which the election is intended to be effective, or any time in the preceding year.

There are membership requirements for S corporation status: Only a domestic corporation may qualify, and there are restrictions on who can be members. There may be no more than 100 shareholders, who may be individuals, certain trusts, and estates, but not partnerships, corporations, or nonresident alien shareholders. An S corporation may have only one class of stock and must follow the same requirements that C corporations must follow—filing articles of incorporation and state-required periodic reports, holding directors’ and shareholders’ meetings, keeping corporate minutes, and permitting shareholders to vote on major corporate decisions.

States differ in their treatment of S corporations. Some totally disregard S status and give them no tax break. Other states automatically honor the federal election. A special, state-specific form may be required for election. Consultation with an attorney in the corporation’s state is a must.

Nonprofit Corporations

There are three basic types of nonprofit corporations: public benefit, mutual benefit, and religious. Public benefit corporations are the charitable nonprofit corporations and qualify as tax exempt by section 501(c)(3) of the Internal Revenue Code. Mutual benefit corporations are corporations that are not public benefit or religious corporations. Examples include fraternal organizations, homeowners’ associations, and country clubs. Religious corporations are corporations organized primarily or exclusively for religious purposes.

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in that section, and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization—it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Section 501(c)(3) organizations are restricted in the amount of how many lobbying activities they may conduct. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.

Professional Corporations

A professional corporation (PC) is a business organization that allows professionals to practice in an association of individuals and offers many of the benefits of a for-profit corporation. A PC may elect subchapter S status. Its name may not be one already be in use by another business entity on record with the state. It must be organized for the sole purpose of rendering a designated professional service and may be formed only by the eligible professionals identified in state law. All shareholders in the corporation must be licensed to render the specific professional service of the corporation. For example, in a psychology corporation, all the shareholders must be licensed psychologists.

Unless the articles of organization specify otherwise, the liability of shareholders in a professional corporation is limited in the same manner and to the same extent as that of a for-profit business corporation. Ordinarily, a state’s professional corporation act does not modify the duty of care owed to a person receiving services from a professional practicing in a professional corporation. In other words, professionals practicing in a professional corporation remain liable for their own malpractice. Some states, however, may provide for exceptions.

There is a significant limitation on personal liability in a professional corporation. While the corporation cannot protect the shareholder professionals against their own negligence, it does protect them against the negligence of each other. Thus, professional incorporation is a useful backup to professional liability insurance.

Limited Liability Company (LLC)

The limited liability company (LLC) is a recently recognized business structure allowed by state statute. This popular new concept shares the corporate feature of limited personal liability of members (owners) for the debts and actions of the entity, and provides management flexibility and the benefit of pass-through taxation. However, the LLC also allows owners to benefit from many of the features of a partnership by providing management flexibility and the benefit of pass-through taxation (not unlike a subchapter S corporation). There is no maximum number of members. As with a sole proprietorship or partnership, there is little if any insulation protecting the personal assets of an LLC’s members from a judgment resulting from a member’s wrong doing in the scope and course of LLC activities.

Because the federal government does not recognize the LLC as a classification for federal tax purposes, such entity must file a corporation, partnership, or sole proprietorship tax return. Over the years, there has been confusion regarding single-member LLCs in general and how they must report and pay employment taxes. A multimember LLC can elect to be classified as either a partnership or a C or S corporation; if it does not so elect, it will be classified for tax purposes as a partnership. A single-member LLC (SMLLC) can elect classification as a corporation or, failing such election, will be automatically classified as a disregarded entity and taxed as a sole proprietorship. If 50% or more of the capital and profit interests of an LLC are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.

Employment tax and certain excise tax requirements for a disregarded entity SMLLC have changed over recent years.

Earnings of most members of an LLC are generally subject to self-employment tax. If, however, the company elects S corporation status, earnings of the entity after paying a reasonable salary to the shareholders working in the business can be passed through as distributions of profits and are not subject to self-employment taxes.

There is a lack of uniformity among LLC state statutes. Businesses that operate in more than one state may not receive consistent treatment. In order to be treated as a partnership, an LLC must have at least two members. An S corporation can have one shareholder. Although all states allow SMLLCs, such entities may not elect partnership classification for federal tax purposes. Some states do not tax partnerships but do tax LLCs. Conversion of an existing business to LLC status could result in tax recognition on appreciated assets. Current federal and state law must be examined to determine what is best for the entity.

Conclusion

Regardless of one’s practice or whether one practices from a bar, a rented office, in a self-owned building, or as an independent contractor for an agency, hospital, or other entity, making the correct choice of practice entity is imperative to reduce potential financial liability. Although a professional cannot protect him- or herself from allegations of professional misconduct or intentional or negligent deviation from the standard of care of the reasonable professional under the circumstances, a corporation can provide insulation to protect your personal finances and that of your family from being attached as a result of an injury, breach of contract, and many other potential liability situations. It is advised that for the minimal cost associated with establishing and maintaining a corporation or LLC, organization of a professional as an entity offering some insulation from personal liability is well worth the expense. The decision must be made having advice of an attorney who is familiar with mental health and human services law and after having discussed in the limits imposed on corporate or LLC entities by individual states’ regulatory departments. The bottom-line financials, tax benefits, and the like must also be discussed with your tax preparer or accountant aware of the professional obligations, criteria, and restrictions of licensed individuals.

Chapter 2

Making Ends Meet: Financial Management in Private Practice

¹

David W. Ballard

A thriving practice that is financially viable provides the resources necessary to deliver high-quality services, as well as the flexibility to engage in pro bono work, community service, professional advocacy, and other non-revenue-generating activities. Whether you work with an advisor or track your finances yourself, developing a better understanding of your financial position can help you improve the profitability of your practice, enhance the quality of your work life, and achieve your financial goals. This chapter reviews several key topics related to practice finance, including sources of funding, working with your accountant, conducting financial and operating analyses, and planning for retirement.

Financing Your Practice

It takes money to start or build a successful business, and when it comes to your practice, financial resources will generally come from self-funding, partners or investors, or debt (or some combination of these). Each comes with advantages and disadvantages and can have major implications for how your practice operates.

Bootstrapping

Starting and building your practice with nothing but your own financial resources gives you freedom from investor demands, can help you run a cost-effective business, and does not saddle you with the stress of repaying loans. The downside is that you may spend a lot of time and energy cutting costs, fighting against limited resources, and trying to do things on the cheap. This approach can drain your personal savings and leave you with limited cash flow, so it is important to start small and take it slow. Many practitioners who choose to go it alone financially start out with a part-time practice, while maintaining other employment in an institutional setting.

Top Seven Tips

1. If you are just starting out, consider sharing office space with an established practice—use an empty office in the suite or do business during days or times when the other practice is closed.

2. Use low-cost but effective marketing techniques, such as public education and community outreach activities, networking, blogging, establishing a strong social media presence, and writing op-eds or letters to the editor of your local newspaper. These approaches cost you only time and energy.

3. Tap into business resources, such as print and Web site design work, from your local university or community college. Advanced students are often required to do projects for real clients as part of their coursework. They build their portfolios, and you get to work with emerging talent, typically at reduced rates.

4. Get paid at the time of service. Without a lot of financial resources, it is important to keep your cash flow healthy. Avoid the cost of invoicing and collecting after the fact and get that money in the bank as quickly as possible.

5. Use free or open-source tools, such as Google Docs or Open Office, rather than paying for expensive software packages for your general administrative needs. Be sure the software is secure, and use only reputable sources to avoid viruses, malware, or data breaches.

6. Connect with your local small business association or chamber of commerce. In addition to gaining visibility in the community and establishing relationships with your fellow business owners (and potential referral sources), these groups often have resources available that can be helpful for business planning.

7. Ask for help. The fact that you are relying on your own pocketbook does not mean you should cloister yourself from the rest of the world. Do not hesitate to ask friends, family, and colleagues for assistance (within reason), and be sure to maintain your relationships and social supports.

Pulling yourself up by your bootstraps can be an effective approach for a solo or very small practice, but over time, you will increasingly need access to capital, in order to grow and sustain your business. Fortunately, compared to other types of businesses, mental health practices do not typically require a lot of money or equipment, but you still need to be realistic about your finances and keep an eye on the money. Take care not to get caught off-guard and owe more than you have coming in. If you continue the approach of not going outside for financing, when capital needs arise, you may need to tap into your personal financial resources by borrowing against your home equity, retirement, or life insurance policies, or other investments, or by using credit card debt for purchases or cash advances. This can be a particularly dangerous move, putting both your business and personal assets at risk.

Finding Partners and Investors

One way to increase your available resources is to partner with a colleague as co-owner of the practice. While this type of arrangement comes with its own set of challenges (e.g., more complex legal arrangements, shared decision making and profits), it also provides the advantage of having a collaborator who is also committed to the success of the practice. Ideally, a practice partner will share your overarching goals, while bringing complementary skills to the table, thereby strengthening the practice.

As with any type of business partnership, it is important to work out the details of the arrangement in advance and have a legal agreement drawn up by an attorney. This may feel awkward or unnecessary when you are partnering with a close friend or colleague, but clarity up front regarding management responsibility, decision-making authority, and how profits (or losses) will be divided can prevent misunderstandings later and keep you and your partner on the same page if unforeseen circumstances arise.

Private investors (sometimes known as angels) and venture capital firms typically look for high profit potential and a quick return on their investment, so unless you are launching a particularly innovative practice, you are unlikely to attract this type of funding. Friends and family members are more realistic sources of funding to help you start or grow your mental health practice. Because they are investing in your success, not just looking for profit, personal contacts tend to have more moderate expectations regarding financial gain. Arrangements can take the form of a loan that you will pay back with interest, or an equity partnership, where the investor actually owns part of the business. Many good relationships have been torn apart by business deals gone bad, so even though friends and family may take a more casual approach to helping out, you can minimize the likelihood of bad feelings later by crafting a formal business plan and laying out the terms of the agreement in a written contract.

Bank Loans

Borrowing money from a bank is one of the most common ways of financing a small business. Banks provide loans that you receive as a lump sum, as well as lines of credit that you can access as needed. Your business plan, credit history, and available collateral will all play a role in whether you get approved for a loan and, if so, how favorable the terms are. The less risk the bank assumes, the better your rates will be. Most mental health practices do not have sufficient assets to guarantee a small business loan; therefore, you may be required to personally cosign. This means that if you default on the loan, your personal assets, such as your home, car, and savings, may be at risk.

As a small business owner, you may not qualify for a typical bank loan, and available financing may cover only a portion of the funds you require. Fortunately, there are some additional resources that can make bank funding more obtainable. Some banks offer loans that are designed specifically for health care practices. With high levels of education, professional status, and solid long-term earning potential, health care practitioners are often considered low risk when it comes to loans. As a result, you may be able to get a health care practice loan that covers all or most of your funding need, carries a lower interest rate, and has fixed-term stability.

These loans can be used to start a practice, expand or improve your facilities, buy new property or equipment, or pay off higher-rate debts. Some banks even provide additional resources for practice loan borrowers, such as a demographic analysis of your office location, a list of preferred consultants and contractors, and practice management tools to help you run a successful business. To find out more about the availability of a health care or medical practice loan, check with your bank and other major lenders.

Financial Assistance From the Small Business Administration

The U.S. Small Business Administration (SBA) is an independent agency of the federal government that is changed with supporting, protecting, and advancing the interests of small businesses. While the SBA does not provide loans directly, the agency offers a variety of programs designed to connect small businesses with commercial lending sources that are small-business friendly (U.S. Small Business Administration, n.d.). In addition to microloans to cover supplies, equipment, and working capital, the SBA offers the following programs:

7(a) loans. These loans are designed to help start-ups and existing small businesses finance working capital, property and equipment purchases, improvements to leased assets, and debt refinancing. Most major U.S. banks participate in the 7(a) program, whereby the SBA sets requirements regarding the structure of the financing and guarantees a portion of the loans, in exchange for the banks making loans available to small business that might not otherwise qualify for a bank loan. The 7(a) program also includes financial support for small businesses in rural and underserved communities.

CDC/504 loans. The SBA works with private, nonprofit certified development companies (CDCs) to encourage economic development within certain communities. CDC/504 projects fund small businesses to buy land or buildings, renovate or improve existing facilities, or purchase long-term equipment. Arrangements often combine a loan from a private lender, a CDC-backed loan, and a contribution from the borrower of at least 10% of the project cost. You can obtain a list of CDCs from your local SBA office.

Online Resources from the U.S. Small Business Administration

List of SBA district offices: www.sba.gov/about-offices-list/2

SBA loan application checklist and downloadable forms: www.sba.gov/content/sba-loan-application-checklist

SBA loans and grants search tool: www.sba.gov/loans-and-grants

Working With Accountants and Financial Advisors

When you started your practice, you most likely handled the financial record keeping, accounting, and taxes yourself. Although the availability of computers and user-friendly financial software makes it increasingly easy to manage your own practice finances, as your practice grows and becomes more complex, tapping into the expertise of an accountant or other financial advisor can pay dividends.

Finding a High-Quality Financial Advisor

Whether dealing with an accountant, a tax advisor, or an investment planner, the following tips can help you get started on the right foot.

Develop a pool of prospects. Use your contacts for references and leads. Check with friends and colleagues who have sought similar assistance, and local chapters of professional associations representing the type of consultant you need.

Interview several candidates. Find out how much experience they have working with health care practices, ask how much services will cost, and find out how the advisor bills (e.g., hourly, fixed fee, on commission).

Look for goodness of fit. Select someone with whom you seem both personally and philosophically compatible. For example, avoid a consultant who takes more financial risks than you are comfortable with or someone who appears insensitive to your level of business expertise. If you are working with a firm, be sure to meet the actual person who will do the job.

Ask for and check references. Ask the candidate for two or three names and contact numbers for former clients with projects similar to yours. In addition to the quality of the consultant’s work, ask about his or her history of availability, follow-through, and ability to understand and meet a client’s needs.

Different Types of Financial Advisors

The terms financial advisor, financial planner, and accountant are typically just descriptive labels, rather than a reflection of the individual’s qualifications or licensure. When choosing a financial consultant, it is important to understand the difference between various credentials and choose a qualified professional who best fits your needs. Here are some common designations:

Certified public accountant (CPA). A legally qualified accountant who has passed a uniform exam and met the education and experience requirements for certification, as established by the state board of accountancy in his or her jurisdiction. CPAs are subject to regulatory oversight by state boards, adhere to a code of conduct, and are required to obtain continuing education in order to maintain their licensure (American Institute of Certified Public Accountants [AICPA], 2011a).

Accredited Business Accountant (ABA). A designation from the Accreditation Council for Accountancy and Taxation that reflects proficiency in financial and managerial accounting, financial statement preparation and reporting, taxation, and business law and ethics for small and medium-sized organizations. Candidates must pass an 8-hour comprehensive exam. In some states, the use of the term accountant is restricted and practitioners use the term Accredited Business Advisor (Accreditation Council for Accountancy and Taxation, n.d.).

Personal Financial Specialist (PFS). A credential from the AICPA for CPAs who specialize in issues related to retirement and estate planning, taxes, investment planning, and risk management. Candidates must possess a CPA license, be a member of AICPA, meet education and experience requirements, and pass a PFS-specific exam (AICPA, 2011b).

Certified Financial Planner (CFP). A credential from the Certified Financial Planner Board of Standards. Candidates must meet the board’s education and experience requirements, pass an exam, adhere to a code of ethics, and obtain continuing education to maintain their certification (Certified Financial Planner Board of Standards, 2011).

In addition to the more common credentials listed above, financial consultants offer up a mind-boggling array of certifications that vary tremendously in terms of legitimacy and requirements. The U.S. Securities and Exchange Commission (SEC, 2012) suggests that you contact the organization that issued any credential to confirm that the advisor actually possesses the qualification and that he or she remains in good standing. The Financial Industry Regulatory Authority (FINRA) provides a convenient online tool for looking up the qualifications and issuing bodies for more than 100 financial industry credentials.

If the advisor is licensed, as in the case of CPAs, you can also check with the state’s licensing board to see if the license has ever been revoked or suspended and if the advisor has been subject to disciplinary action. Contact information for CPA licensing boards is available online from the National Association of State Boards of Accountancy.

Look It Up

Financial Industry Regulatory Authority database of professional designations: http://apps.finra.org/DataDirectory/1/prodesignations.aspx

National Association of State Boards of Accountancy list of CPA licensing boards: www.nasba.org/stateboards/

Tips for Getting the Most From Your Financial Advisor

Many practitioners rely on their accountant’s expertise for generating financial statements and preparing tax returns. Yet some mental health professionals may not take full advantage of the range of accounting services that can help practices thrive. Below are some ways that a good accountant can be an asset to your business.

Bookkeeping

A good accountant will do more than simply keep track of receipts and balance the checkbook. In addition to offering professional guidance about how certain items should be classified when creating financial statements, your accountant will analyze and interpret financial data and generate information essential to tax preparation, strategic decision making, and financial planning.

You can keep costs manageable by doing the simple bookkeeping and document preparation yourself. Ask your accountant to train you, a member of your staff, or a part-time bookkeeper and advise you regarding the best record-keeping formats to use. Creating and adhering to an organized record-keeping system will reduce the amount of time your accountant will need to spend sorting through financial records and searching for necessary documentation.

Keep good records of all financial transactions, provide your accountant with complete and accurate books and well-organized receipts, and automate as much of your financial data as possible using online banking and financial software. There is a bottom-line benefit to using these solid financial practices: They will reduce the amount of time your accountant will bill you for.

Tax Services

As with bookkeeping, available computer technology has made it easier to prepare and file your own tax return with minimal cost. Except in cases where practice finances are extremely straightforward, however, using an accountant to prepare your tax forms may be advantageous for several reasons.

Although it will certainly cost more to use an accountant to prepare your tax statements instead of doing them yourself, those expenses often are recouped as a result of tax savings and deductions that would have gone unrecognized if not for the accountant’s expertise in complex tax law and knowledge of rules and exceptions that often change each year. In addition, working with an accountant can help minimize costly filing errors. And in the unfortunate event that you get audited, an accountant will be able to advise you regarding the best way to present your case.

Beyond preparing your documents at tax time, your accountant can suggest tax-saving strategies throughout the year. Frequent tax law changes often make the timing of certain expenses and deductions important. For example, changes related to deductions for office equipment, structural improvements to office space, and the deductibility of sales tax versus state income tax may result in tax benefits that put more money in your pocket if you take advantage of them at the right time.

Strategic Business Planning

Far from simply being a bean counter, a good accountant can be a trusted business advisor. Be open and honest with your accountant and make sure he or she is intimately familiar with the business operations of your practice. Knowing your professional and financial goals will allow your accountant to offer concrete suggestions for how to achieve them.

A good accountant can also help you create a solid business plan, take full advantage of your practice’s strengths, determine the most advantageous business structure for your practice, use your resources more effectively, and manage revenues and expenses in a way that improves your bottom line. If you are thinking about selling your practice, doing estate planning, or applying for a business loan, your accountant can assist you in determining the value of your practice.

Your accountant also can help you analyze your business operations, identify problems, and suggest possible solutions. Areas to explore with your accountant might include:

Billing, collections, and cash flow

Staffing and compensation

Budgeting and financial projections

Return on investment analyses for new technology or marketing approaches you are considering

Payer mix and reimbursement rates

Establishing mechanisms to monitor financial performance

Financial Planning

Talk to your accountant about any major financial decisions related to your practice. Whether you are thinking about buying new computer equipment, deciding whether to lease or buy office space, or planning a major business trip that you want to combine with a family vacation, your accountant can help you consider the various options, as well as their financial impact and tax implications. Your accountant also can help you establish internal financial controls and financial risk management strategies to help protect your practice.

Although you should not intermingle your personal and business finances, as a business owner, the two are closely connected. An accountant familiar with your practice is well positioned to offer guidance on personal finance topics such as retirement planning, long-term care insurance, wills and trusts, estate planning, personal asset protection, and investment strategy.

Analyzing Your Practice Finances

A basic analysis of financial data helps you track the performance of your practice and implement strategies for a sound financial future. This section describes key ratios and indicators to help you begin the process. Begin by gathering your financial statements including balance sheets and income statements for the past 3 years. Once you have compiled this information:

Calculate the financial ratios listed below for each year. (You may want to use a different time interval, such as monthly or quarterly, if that works better for you based on your bookkeeping system and available financial statements.)

Look for changes and trends, both positive and negative. Have the values gotten better or worse? Sometimes trends are easier to identify visually, so it may be helpful to plot these data points on a graph.

Try to determine the cause of each change. Were the changes planned or expected, or do they come as a surprise?

Pinpoint indicators that look problematic and think about how can you address these problem areas and make improvements. You may wish to consult with your financial advisors in this regard.

Financial ratio analysis uses data from financial statements to help you measure your practice’s financial performance. There are many different ratios you can calculate, depending on your need and the nature of your practice. The main categories and a few examples of each are listed next.

Profitability Ratios

Total Margin (also known as profit margin): Measures your ability to control expenses and tells you how much money you actually keep for each dollar that comes in. For example, a Total Margin of 0.17 indicates that for every dollar of revenue earned, you kept 17 cents. You can improve your Total Margin by increasing rates, reducing costs, or increasing your non–operating revenue. The higher your Total Margin, the better.

Return on Total Assets (ROA; also known as return on assets): Measures how productively you are using your assets to generate revenue by telling you how many cents of profit you generate with each dollar of your assets. A higher ROA means your practice is more productive.

Liquidity Ratios

Current Ratio: Measures your ability to pay back your short-term debts by telling you how many dollars you have in current assets for each dollar of current liabilities. A higher current ratio is better (i.e., 2.0 or higher).

Days’ Cash on Hand: Measures your ability to make your payments when they are due by telling you the average number of days worth of expenses can you cover at any given point in time. You want to strike a balance by having enough cash to pay your bills each month and meet any unexpected expenses, but not having so much that you are not utilizing your assets effectively. For example, you may want to invest extra cash in a vehicle that will generate additional income rather than just leaving it sitting in your checking account.

Debt Management Ratios

Debt Ratio: Measures the percentage of your practice’s total financing that comes from debt. Creditors prefer a lower debt ratio and will be more likely to give you a loan or a better rate, since it means less risk for them.

Debt-to-Equity Ratio: Measures how much you have on credit for each dollar of equity you have. Creditors also look for a lower debt-to-equity ratio, since lending you money is less of a financial risk for them if you have more of your own money invested in your practice.

Asset Management Ratios

Total Asset Turnover: Measures how efficiently you are using your assets by telling you the amount of revenue you generate for every dollar of assets. A higher total asset turnover ratio is generally better, although it is important to strike a balance. Having too many assets reduces your profits, but too few may result in not having enough resources to offer needed services or pursue new sources of revenue.

Days in Accounts Receivable (DAR; also known as average collection period): Measures how effective you are in managing your receivables by telling you the average number of days it takes you to collect a payment. For example, a DAR of 48 indicates that it takes you an average of 48 days from the date you provided a service to get reimbursed. Since you want to collect receivables as quickly as possible, a smaller value is better.

Common Size and Percent Change Analyses

Common Size Analysis: Shows you each item on your income statement as a percentage of your total revenues and each item on your balance sheet as a percentage of your total assets. To calculate, divide each income statement item by total revenues and each balance sheet item by total assets.

Percent Change Analysis: Helps you see what items on your balance sheet and income statement are growing or shrinking and identify potential financial problems that may not be obvious to the naked eye. Calculate percent change year to year for each balance sheet and income statement item.

As previously mentioned, begin your analysis by reviewing 3 years’ worth of historical data. Once you have taken this look back, start tracking these indicators on an ongoing basis and continue to monitor the financial health of your practice.

Analyzing Your Practice Operations

While informative, calculating and tracking financial ratios alone will not necessarily help you understand how your practice operations are affecting your finances. Analyzing operating data for your practice goes a step further and helps explain your performance, so you can make adjustments and implement strategies to strengthen your finances as needed.

As with your financial ratio analysis, begin by gathering relevant data from the past 3 years. Most of the data you need to analyze your operations—such as the mix of professional services you provide and insurance payers you use, along with productivity measures—will come from your practice management records, rather than from your financial statements. Once you have compiled this information:

Calculate the operating indicators listed below, using the same time interval (e.g., annual, quarterly, monthly) you used in your financial analysis.

Look for changes and trends. Long-term patterns or gradual changes are often easier to identify visually, so it may be helpful to use a chart or graph.

Pinpoint indicators that look problematic and think about how you can address these problem areas and make improvements.

Once you have examined the historical data, start tracking these indicators on an ongoing basis to monitor your practice operations over time.

Although there are many operating variables you can explore, the following examples may be particularly helpful to track.

Payer Mix

Break down the percentage of your total payments, the percentage of your total revenues, and the percentage of your total clients by payer. For example, do Medicare clients make up 30% of your total client base, do 17% of your total revenues come from payments from a particular managed care contract, or are 61% of your total payments from private pay clients?

Having a larger percentage of clients or payments coming from a source with higher reimbursement rates is good for your practice finances. Conversely, growing segments from lower paying sources can put a dent in your revenues.

Just like investing, however, you should diversify your revenue sources. This will buffer you in the event of unforeseen changes, such as losing a contract, getting dropped from a panel, or having a particular payer drastically reduce reimbursement rates or no longer cover a particular service.

Service Mix

Look at the percentage of your time and revenues broken down by service type, such as individual therapy, group therapy, assessment, and consultation. This will help you better understand how you are spending your time and what percentage of your total revenue comes from each type of service you provide. For example, you may find that while you spend 60% of your time doing individual psychotherapy, it accounts for only 40% of your revenue. Similarly, psychological assessments may make up only 15% of your time but generate 30% of your overall revenue.

Are you happy with your mix of professional activities? Are you spending a lot of time on services that aren’t contributing much financially? Are there areas of opportunity, where small changes in how you allocate your time could produce significant bottom-line results? Remember to include administrative time for each activity in your calculations. A service that pays $200 per hour might not seem so lucrative if you realize that you spend 7 unbillable hours on administrative work for each billable hour.

Other Operating Variables

You might also want to calculate and track variables such as total number of sessions or units of service per year, month, and week:

You can calculate many of these operating variables by payer and client mix. For example, you might compute average length of treatment or percentage of cancellations and no-shows for each payer and for each primary diagnosis.

A couple of additional considerations reflect your practice setting:

If you operate a larger practice with multiple health professionals, you can gain a better understanding of how the practice is functioning by also tracking the other operating variables listed earlier as well as percentage of total revenues generated by each professional.

If based in an institutional setting such as a hospital or university counseling center, even though you may not have access to financial data, it should be feasible to track the percentage of your time spent delivering each type of service and the other operating variables listed earlier.

Accepting Credit Cards

If your clients ask regularly if they can pay for your services with a credit card, and if you would like to increase the speed and efficiency of your payment collections, you may be interested in accepting credit card payments in your practice.

In recent years, new services and increased competition have made the option of accepting credit card payments more attractive for small businesses. However, accepting credit card payments is not right for every practice. Businesses must consider the cost—usually between 2.5% and 5.5% of sales depending on the number of sales and the size of your transactions—and the administration involved.

Before you make a final decision, review the tips outlined below and talk to your accountant or financial advisor so that you can make the decision that is best for you and your practice.

Getting Started

To begin accepting credit cards in your practice, you will in most cases need the following:

A credit card merchant account. This allows credit card payments to be transferred to the bank account you designate. Most merchant accounts let you accept MasterCard, Visa, and debit cards; additional fees may be required to accept American Express and Discover cards. You can obtain a merchant account from a bank or other lending institution. When you apply for the account, you may be asked to submit