In this episode of the Practice of Therapy Podcast, Gordon talks with Billy Robinson, CPA about some essential things to remember when starting a business. Billy suggests seeking out a trusted CPA and an attorney in order to outsource some of the complicated aspects of running a business. We also learn why it is important to decide on your choice of business entity. Next, we discover how making profits and doing taxes are different when being the business owner as opposed to an employee. Lastly, Billy and Gordon discuss keeping overhead expenses low and some examples of key performance indicators. Overall, self-employment can be very rewarding, yet it is critical to making sure you are spending time ON the business rather than IN the business.
Meet Billy Robinson
Billy is a director based in the Kingsport office of Brown Edwards and focuses his area of practice on construction and real estate related companies, family-owned businesses and governmental agencies. Billy has twice been named a “Super CPA” by Virginia Business magazine and has been named one of the “Top 10 Business People – Under 40” by the Shenandoah Valley Business Journal. Billy graduated from the University of Virginia’s College at Wise with a Bachelor of Science in Accounting and a Minor in Criminal Justice. He is a member of the American Institute of Certified Public Accountants, the Virginia Society of Certified Public Accountants, the Construction Financial Management Association, the Virginia Transportation Construction Alliance, the Shenandoah Valley Builder’s Association, and the Associated General Contractors of Virginia.
Billy suggests seeking out a CPA and a reliable attorney to be your trusted advisors. Familiarize yourself with how owning and operating a business is different from being an employee. Owning a business includes a whole different set of responsibilities. For example, you will need to know how to set up payroll taxes and be familiar with filing requirements.
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Starting a Business
The most important decision is to establish your choice of entity in order to file your income tax return. For a lot of small businesses, the owner does not set up their business as a separate corporation and end up filing as Schedule C. Keep in mind you will not have much legal liability protection when filing a Schedule C. With a single-member LLC (limited liability corporation) the IRS will disregard that entity for taxation purposes and it will be reported on your personal return. Filing as a single-member LLC will earn legal liability protection.
Keep Business Finances and Personal Finances Separate
Owners need to have a type of accounting system for business expenses. Keep separate business credit cards and banking accounts from your personal ones. If being audited, the first thing the IRS will look for is personal expenses that have been charged with your business account. In order for something to be an expense, it has to be considered a necessary and ordinary expense for the business itself. QuickBooks is the best system out there for small businesses.
Startup expenses can be accumulated and written off in the first year. A car can also be written off as a business expense. However, it is important to keep your personal use of the car separate from business use. Keeping a travel log of mileage is a critical way to ensure this. You can even write off the mileage from your personal car at fifty-three cents a mile. Advertising expenses, certifications, training, conferences, and membership fees are all examples of necessary and ordinary business expenses.
The most important thing people do not pay attention to is cash flow. Owners need to maintain a reserve or an emergency fund. If anything happens you will need funds to keep the business running. Are you spending your time ON the business or IN the business? Billing and accounting can be outsourced because you will need to focus on revenue generation. Time management is critical to a service orientated business.
Another mistake Billy sees in new business owners is not understanding how taxes change for them. Businesses have to pay quarterly estimates. If you do not do this, you will end up with hefty penalties at the end of the year. Quarterly taxes are due April 15, June 15, September 15, and January 15. An example of taxes business owners often forget about are the self-employment taxes of 15.2%. Billy suggests setting aside about 30 percent of your revenues to cover sales tax, income tax, and self-employment tax.
Overhead erodes profit quickly. Figure out how much you are able to bill per chargeable hour. Assess how many hours of billable time you have and then set a budget. What kind of overhead can you afford? Keeping your overhead low at first is very important. This means not spending a lot on office space and labor. Billy suggests walking slowly and smartly when first starting a business.
Key Performance Indicators (KPI)
Business owners have to be mindful of their billing structure. A sliding scale method changes depending on the client’s income level. This gives providers the opportunity to have their services reach people of all needs. Also, you will need to understand the amount you bill compared to your contract rate. Rates vary depending on which insurance company you are using.
Gordon suggests finding out which insurance company gives you the biggest bang for your dime. In addition, as a provider, you need to know your average cost and revenue per session. It is vital to understand what your costs are per client and then structure your pay scale to ensure profits are being made. Overall, be realistic of how much time you are going to have and the number of patients you will be able to see. In the future, you will need to be more selective of which type of patients you are taking in.
Email Billy – firstname.lastname@example.org
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Meet Gordon Brewer, MEd, LMFT
Gordon is the person behind The Practice of Therapy Podcast & Blog.He is also President and Founder of Kingsport Counseling Associates, PLLC. He is a therapist, consultant, business mentor, trainer and writer. PLEASE Subscribe to The Practice of Therapy Podcast on iTunes, Stitcher and Google Play. Follow us on Twitter @therapistlearn and Pinterest “Like” us on Facebook.