Financial year-end review: Don't let money details slip away

From tax strategies to cash-flow projections, financial experts suggest now is the time to cover a checklist of items and plan ahead to make sure you can move smoothly into next year.

By Mike Norbut — Posted Nov. 7, 2005

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Between a busy patient schedule, hospital rounds and office emergencies, it's hard to think past the end of the day, let alone the end of the year.

Naturally, long-range planning takes a back seat to the day-to-day work that consumes a physician's time. But if a practice doesn't pay attention to its financial issues as the year winds down, it risks being surprised by events that normally wouldn't faze a forward-thinking practice.

Since budgets usually run on annual cycles and the end of the year flows into tax season, financial experts say now is the time to conduct a financial review and plan for 2006.

Whether your year-end review involves a detailed, written checklist, or even if it amounts to you checking in early with your accountant, the act of planning ahead can result in savings and financial security for your practice.

"The key is you need to start early," said Lisa S. Hastings, a partner in the Dover, Del., office of the accounting firm Faw, Casson & Co. LLP. "What usually happens is I get a call the week before Christmas saying, 'What do I do?' "

Start with expenses

The year-end financial review often starts with tax strategies in mind. Financial experts stress the need to minimize tax exposure by taking advantage of deductions and accelerating some expenses to lower your group's operating income.

Assuming your practice pays taxes on a cash basis -- where you pay based on money in hand, as opposed to the accrual system, which counts uncollected revenues -- expenses play a pivotal role in reducing reportable income.

For example, if you are operating with a healthy margin and know you will need supplies in January or February, you should make the purchase in December to give yourself an immediate tax deduction, advisers said. Thinking ahead and making a purchase a month or two early means you enjoy the tax break immediately rather than 11 months later, they said.

Perhaps the most potent deduction possibility is the Section 179 deduction, the name of which originates from the portion of Internal Revenue Service code that provides for it. The section, which applies through 2007, currently says that if your group purchases equipment valued at less than $410,000 total, it can deduct the entire amount up to $102,000 in the current tax year.

"When a group buys a piece of equipment, it can usually only deduct a portion of it over the life of the equipment," said Philip Goldfarb, a partner with Weisberg, Molé, Krantz & Goldfarb LLP, an accounting firm based in Hicksville, N.Y. "For most physician equipment, you would depreciate it over five years, and standard office equipment would depreciate over seven years."

If you've exhausted your expenses and still need more deductions, advisers said you can always make charitable contributions. Practices are often flooded with requests for donations, so the difficult choice might be deciding which charity is deserving and how much you should give.

If it's possible, you should choose to donate an appreciable asset, such as stock that has gained value or a piece of land, over cash, said Shaun McDuffee, senior vice president and president of the medical division in the Austin, Texas, office of North Star Resource Group. An asset that has gained value would cost you money in taxes when you liquidated it, but if you donate it, you can write off its full value, he said.

While containing income is an important strategy to limit your tax liability, experts say you shouldn't get carried away trying to find deductions for your practice. If your cash flow is tight or you don't plan to use some equipment for six months, it's probably prudent to wait on spending money so far in advance, they said.

"Physicians can get consumed with getting a tax break," McDuffee said. "If you're going to go out and spend a dollar to get 30 or 35 cents in deductions, you should make sure it's truly something you need."

One thing physicians need is some cash on hand, especially as the year comes to a close. Whether it's to pay bonuses or annual bills such as liability insurance premiums, doctors need to plan to have enough money available to cover some atypical expenses that arise.

You may need to be able to cover January payroll as well, if you have new insurance contracts that might cause a delay in payments. A change in the structure of your group also may alter your revenue projections, making it necessary to carefully prepare your practice's budget.

Arthur Androkites, MD, a physical medicine and rehabilitation specialist in Greensburg, Pa., is preparing to make the transition into solo practice after his partner moves to Texas. His revenue projections are going to be considerably lower than when there were two physicians working side-by-side.

"I've had to rethink my practice model to where I'm utilizing more physician extenders," Dr. Androkites said. "Another issue that's critical is keeping up with change. The only thing constant with medical practices over the last 10 years has been change."

Those changes pertain to profit-sharing and retirement plans as well. Financial advisers say that after checking to make sure the plans are still in compliance with any regulatory changes that might have occurred during the year, physician partners should ensure that they have maximized their retirement contributions.

"If you're in the highest tax bracket, every $10,000 you put in your retirement plan will save you $3,500 in taxes," said Ron Finkelstein, a partner in the Ft. Lauderdale, Fla., office and head of the health care consulting practice for the accounting firm Morrison, Brown, Argiz & Farra LLP.

Groups also can make discretionary profit-sharing contributions, as long as they do it for everybody in the practice, McDuffee said.

Handing out bonuses, in whatever form, at the end of the year is a customary practice for many medical groups, but it also can provide a chance to explain to employees how their actions directly affect the group's bottom line.

Jeff Gould, MD, a neurologist and sleep specialist in Bethlehem, Pa., said his employees understand the role they play in making sure there's enough money left in the pot at the end of the year to be split among them. While he will make an occasional early purchase to fit an expense in before the end of the year, Dr. Gould asks his employees to concentrate more on everyday savings.

"If we save supplies, then there's less waste," he said. "More waste takes money away. The better we do, the more we have available for bonuses."

Looking at the budget

The ability to control and trim waste is a critical reason why groups should conduct a year-end financial review. By looking at its budget and how it spent money in the prior year, a practice can make adjustments in its planning for next year.

Likewise, the practice can try to narrow its revenue expectations for next year with some advance planning. Not only is it vital to keep track of the ever-changing Medicare fee schedule, but it's also important to follow up with insurers with whom you contract to make sure they are not changing their own reimbursement rates.

A slight change in how much you're paid for an office visit could result in a difference of thousands of dollars over the course of a year.

Reviewing contracts on a regular basis, such as annually or semi-annually, also can help you see how insurers compare in their reimbursement rates. There's nothing wrong with trying to negotiate higher rates if you see one insurer isn't paying the same rate as others, experts said.

"I'm almost perpetually in negotiations with some insurer," said Dr. Gould, who added that he revisits his insurance contracts every six months. "I would recommend doctors not be afraid to call and say, 'I'm entitled to a pay raise.' "

Financial advisers said physicians should take all of their practice changes into account when devising a new budget for next year, and they can't overlook any potential purchases they might consider in the long term as well. By reviewing information from the current year, you can evaluate what type of new equipment you will need. That in turn will help you determine how it will affect your revenues and expenses for next year, as well as how much you may need to save for the initial investment.

"I coach the client to do their business planning in November," McDuffee said. "If you're going to make changes, it will take a while to get going.

"You have to give yourself a couple of months to ramp up, so when Jan. 1 hits, you've hit the ground running."

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Year-end checklist

Here are some items financial experts suggest you visit as the year comes to a close:

Operating income and expenses: Have you minimized your tax liability and taken all the deductions to which you're entitled? Have you made any charitable contributions?

Pension and retirement plans: Have you and your partners contributed the maximum to your retirement accounts? Are your plans still in compliance with any regulatory changes that occurred during the year?

Cash flow projections: Do you have enough cash on hand to cover year-end expenses such as medical liability insurance as well as January payroll?

Budget: Has your practice situation changed enough to force you to re-evaluate your revenue and cost projections?

Insurance contracts: Have reimbursement rates changed?

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The more things change ...

Here are some possible scenarios that could have an effect on your budget heading into next year:

Capital expenditures: Your practice may be planning to purchase a big-ticket item next year, such as an MRI machine or electronic medical record system, and needs to save money for a down payment.

More or fewer partners:Whether you're expanding your practice or you know a physician is leaving, the change in clinical support will alter your revenue and cost projections.

Office renovation or expansion: Maybe you're looking to add exam rooms, or the current office needs to be updated. Either way, that's a long-term expense for which you need to plan.

Insurance reimbursement: You need to stay updated on the Medicare fee schedule and find out if other insurers will change their reimbursement rates as well.

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