How to Budget for Your First Year in Private Practice

Starting your own therapy practice is an exciting step in your professional journey, but it also comes with a host of financial challenges. The first year in private practice can be unpredictable, which is why creating a solid budget is crucial. A well-crafted budget will help you manage your finances, plan for both expected and unexpected expenses, and keep your practice afloat while you focus on helping clients. In this guide, we’ll cover the essentials of budgeting for your first year, focusing on initial costs, insurance, and those unexpected expenses that are bound to pop up.

An Illustration of a helpful CPA standing in front of a white board teaching therapists how to budget for the first year in private practice

Understand Your Initial Costs

Before you even see your first client, there are a number of upfront costs associated with starting a private practice. Knowing what these costs are and planning for them can make the transition to private practice smoother and less stressful.

Business Registration and Legal Fees

Depending on the structure of your practice, you may need to register your business as a sole proprietorship, LLC, or another legal entity. These fees can vary depending on your state and the type of structure you choose. Additionally, if you need to work with an attorney to draft contracts or other legal documents, those costs can add up quickly.

Cost Estimate: $100 – $1500 for business registration, plus additional attorney fees if needed.

Licensing and Certification

You’ll also need to ensure that your licenses and certifications are up to date. If you’re moving to a new state or adding a new specialization, there may be fees for certification or additional licensing.

Cost Estimate: $200 – $1,000 depending on licensing requirements and professional organizations.

Office Space and Equipment

If you decide to rent office space, you’ll need to factor in the cost of rent, security deposits, and utilities. Even if you choose to work virtually, there will be costs for setting up a home office or ensuring that your telehealth setup meets professional standards.

Physical Office: Rent, utilities, furniture, and decorations can easily run you $1,000 – $3,000 per month.
Virtual Office: High-speed internet, computer, ergonomic furniture, and telehealth software may cost $500 – $1,500 initially.

Insurance

Malpractice insurance is non-negotiable for therapists in private practice. You may also need general liability insurance if you have a physical office space.

Cost Estimate: $300 – $1,500 per year, depending on coverage and provider.

Practice Management Software

Investing in practice management software can streamline your day-to-day operations, helping you manage scheduling, billing, and notes more efficiently.

Cost Estimate: $30 – $100 per month, depending on the software and features you choose.

Marketing and Branding

You’ll need to let people know that you’re open for business. Initial marketing costs may include building a website, designing a logo, and investing in digital advertising or listings on therapy directories.

Cost Estimate: $500 – $5,000 for a website and branding, plus additional costs for advertising.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on the initial costs of private practice

Plan for Recurring Costs

Beyond the initial setup, it’s important to understand your recurring costs. These monthly or annual expenses are crucial to keep your practice running smoothly.

Rent and Utilities

If you’re renting an office space, rent will likely be one of your largest ongoing expenses. Be sure to include utilities such as electricity, water, and internet in your budget.

Cost Estimate: $1,000 – $3,000 per month for rent and utilities, depending on location.

Software Subscriptions

Subscriptions to practice management software, electronic health records (EHR), and accounting software are recurring costs you’ll need to budget for.

Cost Estimate: $50 – $150 per month for software subscriptions.

Professional Memberships and Continuing Education

Maintaining your professional credentials requires ongoing education and memberships in professional organizations. These costs are vital for staying up to date in the field and meeting licensing requirements.

Cost Estimate: $200 – $1,000 per year for memberships and continuing education.

Insurance Premiums

Your malpractice and liability insurance premiums will be recurring costs that you’ll need to pay annually or monthly, depending on your plan.

Cost Estimate: $25 – $125 per month.

Marketing

Marketing is not just a one-time cost. To keep your client list full, you’ll need to invest in ongoing marketing efforts, such as social media ads, Google ads, or therapy directory listings.

Cost Estimate: $100 – $800 per month, depending on the marketing strategy.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on recurring costs of private practice

Set Aside Funds for Unexpected Expenses

No matter how well you plan, unexpected expenses are bound to arise during your first year in private practice. It’s crucial to set aside a portion of your budget to cover these surprises.

Unexpected Office Repairs or Maintenance

If you’re renting an office, there may be unexpected maintenance issues such as plumbing problems, heating or cooling repairs, or other issues that need immediate attention. Even if your landlord is responsible for major repairs, you may need to cover minor maintenance expenses.

Suggested Budget: Set aside at least $500 – $1,000 for unexpected office expenses.

Technology Failures

Technology is essential to a modern therapy practice, but computers, software, and other tech can fail at the worst times. Having an emergency fund to cover repairs or replacements will ensure that you’re not left scrambling to run your practice.

Suggested Budget: Set aside $500 – $1,000 for technology-related emergencies.

Legal or Professional Support

It’s also possible that you’ll need unexpected legal or professional support. Whether it’s revising contracts, dealing with an unhappy client, or getting advice on an unexpected business challenge, having funds set aside for professional support can be a lifesaver.

Suggested Budget: Set aside $500 – $1,000 for legal or professional fees.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on setting aside funds for unexpected expenses

Consider Your Personal Financial Needs

As you’re budgeting for your practice, don’t forget about your personal financial needs. It’s important to determine how much income you need to take from the business to cover your personal living expenses.

Monthly Salary

Determine how much money you need to live on each month, including rent or mortgage payments, utilities, groceries, and other necessities. This will help you set realistic income goals for your practice and ensure you’re not underestimating the financial needs of your household.

Cost Estimate: Varies depending on personal circumstances, but consider what you need to cover living expenses comfortably.

Taxes

As a self-employed individual, you’ll need to pay estimated quarterly taxes. Be sure to set aside a portion of your income to cover both federal and state taxes. Consulting with an accountant can help you determine how much you should set aside each month.

Suggested Savings: Set aside 20-35% of your income for taxes.

Health Insurance and Retirement Savings

If you’re leaving a salaried position to start your practice, you’ll need to plan for health insurance and retirement savings. Consider setting up a Solo 401(k) or SEP IRA to start saving for retirement, and shop around for health insurance plans that fit your needs and budget.

Cost Estimate: $300 – $1,000 per month for health insurance, plus whatever you choose to contribute to retirement.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on personal finance needs

Create a Cash Flow Plan

Cash flow is the lifeblood of any business, and private practice is no different. A cash flow plan helps you anticipate when money will come in and when expenses will need to be paid, ensuring that you have enough funds available to meet your financial obligations.

Project Income

Estimate how many clients you expect to see each week, what you’ll charge per session, and how many weeks you plan to work each year. This will help you create a realistic projection of your income. Be conservative with your estimates, especially in the first few months as you work to build your client base.

Example: If you plan to charge $120 per session and see 25 clients per week, your projected monthly income would be $12,000.

Track Payment Timelines

Keep in mind that payments from clients and insurance companies may not come in immediately. Be sure to account for delays in insurance reimbursement or late client payments when planning your cash flow.

Monitor Expenses

List all of your expected expenses, both fixed (e.g., rent, insurance premiums) and variable (e.g., office supplies, marketing). Compare these expenses to your projected income to ensure you’ll have enough cash to cover your costs.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on creating a cash flow plan

Plan for Slow Periods

The first year in private practice can be unpredictable, and there may be periods where client bookings are slower than expected. It’s important to plan for these slower periods so that you’re not caught off guard.

Emergency Savings

Building an emergency savings fund can help you weather the ups and downs of running a private practice. Aim to save enough to cover at least three to six months of expenses, including both business and personal costs.

Suggested Savings: 3-6 months’ worth of expenses.

Seasonal Considerations

Therapy practices can have seasonal fluctuations, with client bookings often dipping during summer months or holidays. Plan ahead for these times by adjusting your marketing efforts or offering special promotions to encourage clients to book sessions.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on planning for slow periods

Budget for Marketing and Client Acquisition

Marketing is key to attracting new clients, especially when you’re just starting out. Your budget should include funds for building a professional online presence and promoting your services.

Website and Branding

A professional website is one of the most important investments you can make in your new practice. Your website is often the first impression potential clients will have of your services, so make sure it looks polished and provides the information they need.

Cost Estimate: $500 – $5,000 for website design and branding.

Online Advertising

Consider using online advertising platforms like Google Ads, Facebook Ads, or therapy directory listings to get your name out there. Online ads can help target potential clients in your area and generate leads.

Cost Estimate: $100 – $500 per month for online advertising.

Networking

Networking with other therapists, medical professionals, and community organizations can be an effective way to get referrals. Attend local events, workshops, or online webinars to connect with others in the field. While networking often involves time more than money, you may want to budget for event fees or memberships.

Cost Estimate: $100 – $300 for event fees or memberships.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on marketing and client acquisition

Use Budgeting Tools and Software

Finally, using the right tools can make budgeting for your first year in private practice much easier. Budgeting software can help you track your expenses, project cash flow, and identify areas where you may need to adjust.

Accounting Software

Software like QuickBooks, Xero, or Wave can help you track income, expenses, and cash flow. Many of these tools also integrate with practice management software, making it easy to manage all aspects of your practice in one place.

Cost Estimate: $10 – $50 per month for accounting software.

Spreadsheets

If you prefer a more hands-on approach, creating a spreadsheet to track your budget can also be effective. A spreadsheet can help you list all your income and expenses, calculate monthly cash flow, and make adjustments as needed.

Financial Planning Assistance

If you’re unsure about how to create a budget or need help understanding your finances, consider working with a financial planner or accountant who specializes in working with therapists. They can help you set up a budget, plan for taxes, and ensure your practice is on solid financial footing.

Cost Estimate: $100 – $300 per hour for financial planning assistance.

Helpful CPA for therapists illustration of how to budget for the first year in private practice focusing on budgeting tools and strategies

Final Thoughts

Budgeting for your first year in private practice can feel overwhelming, but it’s an essential step to ensure the long-term success of your business. By understanding your initial and recurring costs, setting aside funds for unexpected expenses, and creating a solid cash flow plan, you can navigate the financial challenges of private practice with confidence. Remember that every practice is unique, and your budget may need to be adjusted as you learn more about your business and client base. The key is to stay organized, plan ahead, and be prepared for the inevitable surprises that come with running your own practice.

If you’re feeling uncertain about creating a budget or managing your finances, consider reaching out to a financial professional like Helpful CPA. We specialize in helping therapists start and grow their private practices, providing personalized guidance every step of the way. Schedule a free consultation.