Whether you’re working as an independent contractor (1099) or a practice owner, you have a BUSINESS. As a business owner, you need to keep track of your finances and the very first step to that is bookkeeping. I know, I hear you yawning – but don’t take it from me, listen to the wise words of Charlie Munger, Warren Buffet’s business partner and BILLIONAIRE:
“You have to know accounting. It’s the language of practical business life. It was a very useful thing to deliver to civilization. I’ve heard it came to civilization through Venice which of course was once the great commercial power in the Mediterranean. However, double entry bookkeeping was a hell of an invention.”
You might be wondering, “Isn’t that what I pay my accountant to do?” The answer is: you could, if you want to spend a small fortune; but this work doesn’t require a professional accountant to do it – you could do it yourself or hire a bookkeeper for a few hours per week to help you.
To do this, you will need accounting software – there are many good ones out there, such as QuickBooks (the most popular), Wave, Sage, Xero, etc. I personally use QuickBooks Online, but the important thing is, is just to use one.
WHAT do you need to keep track of?
Every. Single. Penny. You need to keep track of how much money your practice is collecting, how much you’re spending on business-related expenses, and from which account (checking, credit card, petty cash) it’s coming from.
WHY do you need to keep track of it?
1. Ease of applying for loans
Anytime you’re asking anyone for money, they’re going to want to look at the financial health of your practice. They’re gauging the likelihood that you might default on a loan. If you were practicing pre-COVID, then you would know that having profit and loss statements at your fingertips made applying for the PPP, EIDL, and CARES Provider Relief Fund WAYYYY easier and quicker to fill out.
2. Embezzlement prevention
We talked about collections skimming in our Day Sheets post, and now we’re talking about catching illegitimate expenses. For example, your office manager could be buying things for themself on the company credit card. You can only catch this through reviewing receipts, which is how you enter transactions into the accounting software.
3. Accurate financial health
Without keeping track of your finances, you can never have an accurate picture of how your practice is performing financially. Just knowing that you’re staying afloat is not enough! This information is important for making financial decisions, such as whether or not you can afford to buy a new piece of expensive equipment, or when the ideal time to push marketing is because you have a seasonal slow period.
4. Taxes & deductions
Taxes are a part of doing business, unfortunately. However, the IRS won’t tax you for money earned that is being reinvested into your business – this is called a deduction. Even if you’re an independent contractor (1099), there are deductions you can take advantage of such as car mileage or your cell phone, but the only way you can take these deductions is by keeping track of your spending!
5. Selling your practice
At the end of your career, after decades of hard work, you’re going to sell your practice. This will be the crowning achievement of your career, and a big part of your retirement nest egg. Anyone who is interested in your practice is going to want to look at the financial health of your practice – if it is murky and unclear, this will be a red flag to any potential buyer!!
I know it sounds tedious, but keeping clean and complete financials will make your life easier when you need it most! If you want to hire a bookkeeper to help you, then my biggest tip is to contact the accounting department at your local college and hire a student! They are bright, looking for real-world experience, and are flexible with their hours. If you have a bookkeeping manual, it will be even easier to train them because they already have basic accounting knowledge; if not, have them help you draft one.