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8 Mistakes New Practice Owners Make
The process of starting a practice is truly exciting. It’s full of amazing opportunities – and many potential pitfalls. For practice owners just starting out, or those who still in their first years of practice ownership, there can be a steep learning curve. Here are some of the most common mistakes made by new practice owners:
#1 – Not Having the Right Support Team
We hear it almost every time a new client comes into our office: “I went to dental/medical school… not business school!”
So, who should be the members of your team? Ideally, you will have an in-state attorney specializing in contracts, a local CPA, an insurance broker, a local realtor, a banker, a practice management consultant, a marketing specialist, a bookkeeper, and an IT professional.
You don’t know what you don’t know, and it’s hard to find out unless you surround yourself with experts to guide you through the various components of owning a practice. Sure, you may have friends who are successful practice owners who are happy to give you advice – but even the most successful practice owners aren’t always doing everything right. We talk to dozens of practice owners each year who aren’t in compliance with state or federal laws – or best practices – simply because they decided to do what another practice was doing. It’s great to have moral support from others who have been where you are – just make sure you run those ideas past your advisor.
#2 – Getting Ahead of Yourself
One of the most exciting aspects of starting a practice is deciding on a name. Your practice name really gets the ball rolling when you think about everything coming together – your practice philosophy, target demographics, branding, etc. But when it comes to the process of establishing an entity with that name, sometimes practice owners get a little ahead of themselves, specifically when it comes to electing for their entity to be treated as a corporation.
Sure, you can go online and apply for your entity, pay the couple of hundred dollars, and there you go – you have a business. But whether your business should be a PLLC, sole proprietorship, S-Corporation, C-Corporation… those are decisions you should make with your CPA. We’ve had clients come into our office, say they have a business entity for their practice, and have no idea whether they elected to be treated as a corporation. Just because you have an “entity” doesn’t mean you have a “corporation” – and there’s a huge difference when it comes to taxes. You want to make sure that election is made at the right time, so don’t get ahead of yourself just because you happened to find the right forms.
#3 – Thinking Too Small (and Cutting Corners)
“I’m just starting out as a one-doctor practice. I’m too small to need a…”
Finish that sentence with just about anything related to the successful management of a practice. Business plan? Bookkeeper? CPA? Practice Management Consultant? Employment attorney? HIPAA or OSHA training firm? Medical-specific real estate advisor? IT or network administrator? Human Resources Information System? Web designer or marketing consultant?
Telling yourself you’re not a big enough enterprise to require advisory or business support services is detrimental to a successful start of your practice, and ultimately to your bottom line. Cutting corners on advisory means less access to the expertise needed to launch and grow your dream practice.
#5 – DIY-ing Everything
Even worse than thinking you don’t need these services is thinking you can save a little money by doing them yourself. The problem with this is three-fold:
You may not have the necessary experience or knowledge to achieve professional results. Knowing how to use Twitter does not make you a social media marketer.
You’re likely to lose a lot more than you saved when issues arise. You may think the payroll service you signed up for is all there is to total compensation, but when you end up with high turnover you can’t resolve or a Department of Labor claim that costs you thousands of dollars in attorney’s fees, you’re going to wish you’d hired that consultant when you started.
The few dollars you’ll save by DIY-ing can equal a significant loss of opportunity cost. You may spend a few hours each week doing your own bookkeeping, but that’s time you could have been spending on treating revenue-generating patients or investing in marketing activities. Also, you’ll potentially end up with a higher bill for tax preparation at the end of the year when your CPA has to spend more time cleaning your books because you miscategorized transactions.
#5 – Failing to Plan for Contingencies
Surprises happen. When you’re starting your first practice, the surprises are bigger and often more expensive. Setting aside money from your practice loan – and then each month as your revenue grows – for contingency expenses is a smart habit that many practice owners fail to establish.
Another piece of advice many new practice owners may be surprised to hear is it’s wise to open a few lines of credit. Think about it – while you’re in the process of opening your practice, you’re likely still earning income from an associateship at another practice. This makes your income look higher than it will in the first two or so years of your practice operation.
Creditors are willing to lend money to individuals who can show high income, but won’t be so keen on it when you’re trying to keep your tax liability low by taking as few draws from the practice as possible. Those credit cards may not be needed now, when your practice loan is new and you’re feeling rich; but in a year or so when surprises come up and you’re out of available funds, you’ll be glad you have a backup plan. You don’t have to keep a high balance on the cards, just have them available for contingency expenses – although, bonus if you can get a rewards card and benefit from charging practice expenses that are paid off each month.
#6 – No Organization
There’s a lot of paperwork – hardcopy or digital – that floats around during a practice start-up or acquisition. The number of documents relating to the organization of your entity, practice loans, purchases, real estate contracts, and employing a team can be overwhelming, and it’s all too easy to let those files sit in your inbox or filing cabinet to be organized later. This is a mistake!
Disbursements from your practice loan are the most common source of disorganization. We’ve seen clients who didn’t keep a single invoice because “the bank was making the payment” and they sent everything to the lender. The first time you’re due to have your taxes prepared for your new practice you will wish you kept better track of your paperwork. Disorganization can delay your tax preparation and increase the fees your CPA charges due to the time needed to sort through piles of papers and follow up on document requests. It can also make it more difficult to get 1099s out on time, send practice statistics to your lender when they require updates, and apply for additional loans, like a mortgage.
#7 – Impatience
Just like sitting rush hour traffic is unnecessarily frustrating to some people (if you do it every day, you should expect it, be patient, and plan for it), the timeline of starting a practice and getting things off the ground the first couple of years is frustrating. Sure, there are unusual things that come up that cause unexpected delays, but for the most part each practice owner can expect the following:
Loan approval gets delayed, often because more documentation is needed.
Construction and build-out can take one to twelve months longer than expected.
Tax preparation will take longer, as Schedule C and corporate returns are more involved than individual returns.
Hiring and managing employees isn’t as simple as it seems. It often takes longer than expected to get the right team in place, and then additional time to train them to the point where they’re productive.
Growing your patient base isn’t a science, and the rate at which you accept and convert new patients depends on multiple factors that can make you nervous if you haven’t planned ahead.
Once you start billing patients, it can be weeks or even months before you see a dime from your collections efforts.
It’s truly common to experience setbacks when starting a practice. Impatience will only cause added stress on you and won’t make the process go any faster. Take a deep breath. Relax. Be prepared to wait. Everything will be okay.
#8 – Not Truly Understanding Practice Ownership
Congratulations! You’ve made it to opening day and your first patients are walking through the doors… now what? You can go back to practicing your craft and treating patients, right?
Sure. Except that now you’re not just a practitioner, you’re a practice owner. There’s employees to manage, books to keep, numbers to analyze, marketing plans to execute, more bills to pay than you ever thought possible, ongoing regulation changes, liability to mitigate, and so much more. You need to keep your focus, continue to learn, and surround yourself with advisors and mentors who keep you on track.
BONUS: #9 – Forgetting to Enjoy the Process!
There is a lot of work involved with starting a practice. You’ll be facing long days, sleepless nights, and a magnificent amount of stress. It’s one of the biggest financial investments you’ll make in your lifetime – but that doesn’t mean it shouldn’t be fun! Don’t forget to step back and look at the amazing goals you’re accomplishing, to have a little fun when you’re selecting supplies and designing your office space, to enjoy creating employee policies that will guide your team to fulfill your practice philosophy, and to take pride in working with your financial advisor to set your practice up for success. If you don’t have a little fun with it, you’ll be burned out before you see your first patient. The journey is part of the destination. Enjoy it!