Many new therapists to private practice set up an accounting system as an afterthought.

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They use spreadsheets or software to keep on top of bookkeeping, and it works—for a while.

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Busier practices need more complex bookkeeping systems. But when it’s time to upgrade from Excel or free accounting software to something better, how do you make the switch?

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Here’s your complete guide to switching accounting systems for your therapy practice: when and how to do it, and how to get started.

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What are accounting systems for therapy practices?

Your accounting system (also called your bookkeeping system) is the method you use to track day-to-day transactions and prepare financial reports.

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Day-to-day transactions include revenue your therapy practice earns, as well as expenses it incurs, in the course of doing business. 

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Financial reports take the form of a profit and loss statement (P&L), balance sheet, and in some cases, a cash flow statement. They summarize how your business has earned or spent money over particular periods, as well as how much cash you have on hand and any debts you carry.

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You can run your own accounting system, using spreadsheets or software. Or you can have a professional take care of it for you. Usually this professional is a bookkeeper.

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Or you may use a full-service bookkeeping solution like Heard, which combines the hands-on visibility of accounting software with professional support—so your bookkeeping and taxes are handled for you, but you still have ‘round-the-clock access to your practice’s financial info.

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The different types of accounting systems used by most therapists can be sorted into four categories.

Spreadsheets

Either creating your own template or using one you find online, you enter your daily transactions into a spreadsheet in order to track them. 

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Templates vary widely in complexity: some act like rudimentary notepads for tracking data, while others use formulas to generate totals and even create financial reports. Most templates only use a single-entry bookkeeping method.

Software

You can either manually enter your bookkeeping data into accounting software, or set up the software to automatically import transactions from your bank accounts and credit cards. Usually it’s up to you to categorize each transaction. 

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Software is usually available for monthly subscription cost.

Bookkeeper/accountant

You hire a professional who keeps your books up-to-date for you, either by referring to receipts you’ve collected or by automatically importing the data from your bank accounts and credit cards. 

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Many freelance bookkeepers and firms use versions of the same software available to business owners—that is, the same software you’d buy if you were doing your own bookkeeping. 

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The cost of hiring a professional bookkeeper varies according to how many transactions you need to track each month. The more time it takes to do your bookkeeping, the more you’ll pay your bookkeeper.

Heard

Your transactions are automatically imported from your bank accounts and credit cards, then categorized and entered on the books by a team of remote bookkeepers who specialize in serving therapy practices.

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Your team also creates monthly financial reports. And you can log into your Heard account any time for a real-time view of your business’s financial data. 

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Unlike a typical freelance bookkeeper, Heard will file your taxes for you and calculate your quarterly estimated tax payments.

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When is it time for your business to switch accounting systems?

Each of the accounting systems available to therapy practices has its own benefits and drawbacks. 

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If your business is growing and you can’t keep up with the bookkeeping, the kinds of challenges you face will look different depending on whether you use spreadsheets or accounting software. 

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But, in general, these are the signs to watch out for.

You make bookkeeping mistakes (and suffer the consequences)

A relatively minor mistake doing your own bookkeeping can have nasty consequences for your business. 

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Some common errors:

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• Forgetting to enter expenses on the books, and overestimating how much cash you have available
• Entering revenue on the books before you have the cash in hand (eg. money transfer delays, scheduled payouts from Stripe or Square), and overestimating how much cash you have to spend
• Miscategorizing expenses, so claiming deductions when you file your taxes becomes a nightmare

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Errors in your bookkeeping don’t just give you inaccurate information to work with, so it’s difficult to make smart financial decisions; they also cause trouble when tax season rolls around.

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In order to accurately file taxes, claim deductions, and estimate the next year’s quarterly tax payments, you need to produce a year-end report summarizing all your financial activity. That’s only possible when your books are accurate and up to date.

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So all-too-common errors and bad bookkeeping habits can snowball, leading to issues filing taxes, which in turn—thanks to missed deductions or IRS penalties—creates financial stress, which puts even more pressure on your bookkeeping system as a whole.

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The best time to upgrade to a more effective system is when bookkeeping errors first crop up.

You can’t answer simple questions about your finances

How much revenue did your practice earn last month? How much of that did you keep as taxable income? What expenses did you incur?

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These very basic questions are answerable by glancing at last month’s P&L. But if your books are out of date, or you don’t have a system in place to generate financial statements, they can take hours of digging through data to answer.

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What do you need to earn next month to cover your overhead expenses? What should you expect to earn in income, based on how your business has performed this year so far? If you’re carrying debt, how much longer will it take you to pay it off completely?

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Again, your P&L—plus your balance sheet—should give you the information to answer these questions. When you don’t have these answers at hand, it’s like you’re driving at night without headlights: at best, you can only see a short distance ahead, and any dangers are liable to leap up suddenly.

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It’s entirely possible to do your own bookkeeping with spreadsheets and software and keep this information to hand. But if you don’t have the time (or the diligence, or the inclination) to keep your books and financial reports up to date, you’ll find yourself scrambling when it’s time to answer the big questions.

You’re late filing taxes

Unless you file for a tax extension before your taxes are due, late tax filing almost always results in a penalty.

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Especially when filing an extension can buy you an extra six months’ time to prepare, there’s no good reason for your therapy practice to be late filing taxes. Having out-of-date or disorganized financial records is not a valid excuse, and—as a business owner—it isn’t one you should get used to making. 

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If you’re late filing taxes and the IRS penalizes you, consider it a warning, and take action by upgrading your accounting system to one that’s able to keep up and help you file on time.

You file your taxes incorrectly and get penalized

Miscategorizing deductible expenses, under- or over-reporting your income, or simply forgetting to carry the one can all lead to errors on your tax return, which in turn lead to penalties from the IRS.

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Like late tax filing, there’s no really good excuse for making an error on your taxes. If you have difficulty with taxes and other money matters, you can outsource your filing to a professional. And, if the problem is that you don’t have accurate data you can use to prepare your tax return, you can upgrade your accounting system to something more rigorous.

You’re preparing to hire contractors or employees

Once you have employees or contractors working for your therapy practice on a regular basis, you’ve reached the stage in your growth where back-of-napkin calculations won’t cut it as far as bookkeeping goes.

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Not only does setting up payroll or reporting fees paid to contractors add extra bookkeeping work to the pile, but you’re now accountable to more people for keeping your books in order. Bad bookkeeping could mean employees get paid late, and that hurts everyone involved.

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When you start hiring employees and contractors, it’s time to hire a professional bookkeeper or sign up for Heard.

You want to incorporate your therapy practice

If your therapy practice is big and full-time enough to warrant forming an LLC or S corporation, then it’s also big enough for a professional bookkeeping solution.

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Depending on your state, you may need to file annual reports to maintain your LLC status. And once your practice becomes an S corp, the way you pay yourself—and how that affects your taxes—gets a lot more complicated than it was before. 

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Since you’re willing to invest time and money to create a new business structure, consider making another investment and upgrading your accounting system.

Your business is unsustainable, and you’re not sure how to fix it

When revenue can’t keep up with expenses, it’s time to make some changes to how you do business. And if you can’t pinpoint the problem—are expenses too high? revenue too low? cash flow too slow?—it’s impossible to get started.

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A solid accounting system gives you the information you need to make smart financial decisions and avoid problems in the first place. And even if things do start to go slightly off the rails, it gives you the information you need to straighten everything out again. 

Your bookkeeper is difficult to contact

Unfortunately, hiring a bookkeeper isn’t a one-size-fits-all solution for your practice’s financial needs.

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Different bookkeepers bring different skills to the table. Some of them fail to deliver when it comes to communication. 

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As a real-life example, in his interview with Heard, Dr. Justin Dodson recalled struggles he faced early on after hiring a bookkeeper:

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She wouldn't show up to meetings, her responsiveness wasn't great, I didn't really understand the documents that I was looking at. Once she missed another meeting, I stopped working with her.

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If your current bookkeeper is failing to deliver the goods, don’t assume every other bookkeeper will be the same. And don’t guilt yourself into working with a professional who doesn’t work for you. It’s better to cut the strings now than let the problem grow. 

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In Justin’s case, the right choice for his practice was to sign up with Heard. Since our teams work exclusively with remote clients, communication is high priority (and easy to do through the Heard dashboard).

Your bookkeeper is slow to update the books

Up-to-date books are one of the biggest benefits when using a professional bookkeeping solution. 

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You should be able to take in your latest financial reports and your most recent transactions at a glance and get insight into how your practice is performing.

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If you find you’re often left waiting for your bookkeeper to categorize transactions, or your financial reports are showing up well past the first of every month or quarter, you may want to talk to your bookkeeper. If they can’t guarantee an improvement, it might be time to try a different solution.

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How to switch accounting systems for your therapy practice

Once you’ve decided it’s time for your therapy practice to upgrade to a new accounting system, the next steps you take will depend on which system you’re adopting and which one you’re leaving behind.

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In any switch, you should ideally be able to migrate all your already-existing financial data (stored in your old system) to the new system you adopt. How complicated it is to do that depends on the thoroughness of your old system’s recordkeeping and the demands of the new one. 

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If you’ve been accurately categorizing and dating all your transactions already, the amount of effort it takes to switch should be minimal. If you haven’t, and you need to retroactively categorize and date your past transactions, the workload will be heavier.

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With that in mind, here’s what to expect.

How to switch from spreadsheets to accounting software

Cost: Accounting software designed for business (rather than personal) use starts at around $13 per month. Added features like multiple users or non-US currencies increase the price.

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Time: Budget one or two weekends to transfer your data from spreadsheets to accounting software. Most popular accounting software lets you import spreadsheets. Your spreadsheets should be organized into columns (eg. one column for the transaction amount, one for its category, etc.) and have consistent formatting throughout. If your spreadsheets aren’t correctly formatted, you may need to go back and edit your spreadsheets before importing them. You may also need to recategorize transactions to fit your new books’ chart of accounts.

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Learning curve: It shouldn’t take more than an afternoon to learn the basic functions of new accounting software—importing transactions, generating profit and loss statements, and other day-to-day tasks. For more complicated maneuvers, like integrating your accounting software with your billing platform, be prepared to spend some time on YouTube watching tutorials. 

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Benefits:

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• Automatic transaction imports. Software’s biggest benefit is that you can set it up to automatically import transactions from your bank accounts and credit cards. No more manual entry.
• Financial reports. It’s much easier to generate financial reports with software than with spreadsheets.
• Upgradability. If you decide to hire a professional or sign up for Heard, it’s easier to transfer your data from accounting software than from a custom spreadsheet. 

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Drawbacks:

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• It all depends on you. Categorizing transactions, making sure the data imported to your software is accurate, and producing financial transactions are still your responsibility. Any errors you make could lead to inaccurate books and incorrect tax filing.
• Learning curve. The time it takes you to get familiar with the new software will depend on your overall tech competence, as well as your understanding of basic accounting terms. If you’re not tech savvy and accounting stresses you out, be prepared for a slower onboarding experience.
• Time cost. You’ll still need to set aside time to do your own bookkeeping. That means investing more time than you would if you had professional support.

How to switch from spreadsheets to a professional bookkeeper

Cost: If your books are very simple, a freelance bookkeeper hired online can cost less than $100 per month. Otherwise, be prepared to spend more. The more complex your books, and the more transactions that need to be categorized, the more you should expect to pay. Retroactive bookkeeping—the process of importing your old spreadsheets into the bookkeeper’s accounting software—can cost anywhere from a few hundred dollars to a few thousand, depending on how much data there is to import.

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Time: If you already have all the data your bookkeeper needs stored in spreadsheet format, it shouldn’t take your new bookkeeper more than one or two months to complete your retroactive bookkeeping while they handle your day-to-day bookkeeping. 

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Learning curve: Your bookkeeper may require you to use accounting software to import your data and help categorize any transactions they’re uncertain about.

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Benefits:

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• (Mostly) hands-free bookkeeping. With a bookkeeper working for you, almost all the day-to-day of managing your books is taken care of. 
• Dependability. So long as they’re qualified, you can trust your bookkeeper to know what they’re doing; the burden to get everything just right no longer falls on you.
• Professional advice. Your bookkeeper may be able to suggest ways to categorize transactions or organize your books so tax season is easier.  

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Drawbacks:

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• No tax support. Bookkeepers strictly handle day-to-day finances. It’s still up to you to file your taxes (or hire an accountant). 
• Your results may vary. Some bookkeepers are attentive and easy to communicate with. Others are not. There is no universal quality standard for freelance bookkeepers. 
• Lack of specialization. Not all bookkeepers are familiar with therapy practice revenues, expenses, and billing cycles. You may need to work with your bookkeeper to help bring them up to speed.

How to switch from accounting software to a professional bookkeeper

Cost: If your practice is very simple, with few transactions to enter on the books, you can hire an online bookkeeper for less than $100 per month. Otherwise, be prepared to pay more. If your books are not up to date, or if you’ve made errors categorizing transactions with accounting software, be ready to pay a few hundred to a few thousand dollars for retroactive bookkeeping. 

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Time: Any bookkeeper you hire should be able to start working on your current, day-to-day books while importing your data and tackling any retroactive bookkeeping necessary. Since bookkeepers use accounting software to do their job—they may even use the same software you do—you can expect the process to take less time than it would with spreadsheets.

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Learning curve: If you’re already using accounting software to categorize transactions, and you’re familiar with basic accounting terms and financial reports, the learning curve once you hire a bookkeeper is virtually nil. 

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Benefits:

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• (Mostly) hands-free bookkeeping. Your bookkeeper will import and categorize most transactions for you. 
• Dependability. A qualified bookkeeper will produce error-free books for you. You don’t need to worry about miscategorizing transactions or making other errors.
• Professional advice. Your bookkeeper may be able to suggest ways to categorize transactions or organize your books so tax season is easier.  

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Drawbacks:

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• No tax support. If you need someone to file your taxes for you, you’ll have to hire a professional accountant.
• Your results may vary. Some bookkeepers are attentive and easy to communicate with. Others are not. There is no universal quality standard for freelance bookkeepers.
• Lack of specialization. Not all bookkeepers are familiar with therapy practice revenues, expenses, and billing cycles. You may need to work with your bookkeeper to help bring them up to speed.

How to switch to Heard

Note: Because Heard offers free retroactive bookkeeping and specializes in working with therapy practices, the process of switching is fairly similar no matter what type of bookkeeping system you already have in place. 

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Cost: Heard starts at $199 per month, with no added costs for tax filing or retroactive bookkeeping. View our pricing. 

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Time: Once you sign up, Heard will start handling your practice’s bookkeeping immediately, while taking care of any retroactive bookkeeping needed to get your finances up to date.

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Learning curve: Your Heard dashboard gives you an up-to-date view of all your practice’s financial info and lets you communicate with your bookkeeping team in real time. It’s designed to be simple for non-tech-savvy users unfamiliar with accounting software, but there may be a slight learning curve as you make yourself familiar with the different pages and graphs.

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Benefits:

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• Full tax support. Your bookkeeping team doesn’t just handle day-to-day bookkeeping. When tax season rolls around, they’ll file your taxes and estimate the new year’s quarterly tax payments.
• Specialization. Heard exclusively serves therapy practices. 
• Time savings. With your transactions automatically imported into Heard and categorized by your bookkeeping team, there’s no need for you to handle day-to-day bookkeeping tasks.

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Drawbacks:

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• Not a good fit for part-timers. If your therapy practice is still growing, or if you’re running your own practice as a side job, Heard may not be a good fit for you. Heard is best suited to practices with one or more full-time therapists working. 

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—

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Need help with your finances, but not sure who to hire? Learn the difference between an accountant and a bookkeeper. 

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.

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