5 Things You Must Do With Your Finances In Private Practice
When you’re brand new to private practice, everything can feel overwhelming. For many of us, the most difficult learning curve is how to properly manage our finances.
There is so much to know about managing your income and expenses, balancing your personal and business expenses, hiring an accountant and/or bookkeeper, knowing when to register for an HST number, how much to set aside for taxes, and how to put yourself in a good financial situation.
Many of us spend years (or our whole careers!) trying to learn more about and refine this aspect of your business. Like anything, we can’t learn it all at once! And unless you plan to go back to school for yet another degree and get your MBA, you’re probably like me and are learning this piecemeal as you go!
That said, there are 5 things that I WISH someone has told me when I was first starting out (because, of course, I learned the hard way). If these 5 things are literally all you do in your in your first year of private practice, you will most likely be okay … and be spared a TON of headaches and hours of painstaking paperwork come tax time.
Here they are!
Track your income
It doesn’t matter how you do it, but find a way to accurately track your income from your business. Keep it separate from money you are gifted or receive through sources other than your business.
Personally, I like to have a completely separate account where I deposit all of my income. That way, I have an easy way to track it over the course of the year and I can see every deposit ever made.
If I receive money as a gift or through any other sources that I don’t have to claim, I don’t count that as part of my business income, and don’t deposit it into my “income account”.
Create a separate chequing account for business expenses
I’m somewhat embarrassed to admit it, but for my first year in private practice, it never occurred to me to have a separate account for business and personal expenses. Come tax time, it was a nightmare to try and sort it all out!
Before you spend your first dollar on your business, I highly recommend opening up a separate chequing account (it does not need to be a specialized “business chequing account” … just a regular one will do). If you have a separate account for your income (See #1), then you just transfer money each money, or biweekly, from your income account to your business account, so you have enough money in there each month to cover your business expenses.
Get a separate credit card for business expenses
Chances are that not all of your business expenses will come out of your chequing account. At some point, you may want to use a credit card for business expenses, for ease of purchasing online or while travelling.
A business credit card is not necessary if you are committed to using your business chequing account and cheques, but it’s something that many of us will choose to have.
That said, follow suit from your chequing accounts and open up a separate credit card that is JUST for business. Don’t use this card for personal expenses or anything besides your business expenditures!
Track your business expenses
Like your income, it doesn’t matter how you track your business expenses… you just have to track them! Whether you keep all your receipts (ahem… please make sure you keep your receipts regardless of whether you use them to track expenses!) and use them to input all of your expenses into a spreadsheet or you have another system that works for you, just make sure you’re tracking them accurately.
If you hire a bookkeeper (which for me personally, is a necessity), they will take over tracking and reconciling your income and expenses for you, which can make things easy.
Or (and this one is my favourite option), if you have created a separate account for business expenses and have a separate credit card for your business like I recommended in #2 and #3, all you have to do is hook your accounts up to a software program like Waveapps, Quickbooks or Freshbooks, and the program will track it all for you!
Of course you’ll have to go in and make sure everything transferred over properly, but it’s a heck of a lot faster than the old paper and pen method, or tracking via a spreadsheet.
Set aside money for taxes
If you do nothing else in your business in your first year (assuming you expect to earn over $30,000 in your first fiscal year), be sure to set aside money for taxes!
Even if your income is less than $30k, it can be a great habit to get into. Worst case scenario, you’ll have extra money leftover at the end of the year and you can give yourself a nice bonus!
Based on your personal financial situation, ask your accountant to give you a ballpark percentage figure of how much they anticipate you will owe at the end of the year, both in HST and personal taxes. Generally speaking, this figure it anywhere between 15% - 35% of your gross annual income.
If you’re not quite sure, and just want to get started on setting some money aside, consider putting 20% - 25% of your gross annual income into (yet another!) separate chequing or savings account. Hold yourself accountable to not touching that money throughout the year.
Word of caution… when you see that figure starting to rise, it will tempting to withdraw and use it for something else like paying off debt, or a nice winter vacation! You might consider opening an account up at a different bank so you won’t look at it all the time!
At the end of the year, or when you get to the point of needing to make quarterly tax instalments, you’ll be very grateful that you’ve set that money aside!
If you’re feeling overwhelmed with the financial aspect of your business, I recommend finding a great accountant or bookkeeper who can help. If you need help organizing or understanding your business, I invite you to check out the BYPP Programs designed to guide you through every phase of your private practice journey.
