A physician owed $1 million in taxes but had only a few hundred thousand in cash. The problem: accrual-basis accounting counted depreciation and working-capital adjustments as taxable income even though they didn't generate actual cash. The doctor had to borrow to pay the bill.
I was working with a doctor years ago and, you know, he hired me in to help him out with his strategy and just some financial pieces of his business. And he said, Steve, I got this bill. I owe, you know, $1 million in taxes and I have no cash. Yeah. I mean, he had like $200,000 or $300,000 in the operating account, but he's like, how is this even possible? How do I— how do I owe this money when I don't have the cash? And when I looked at the books, it is like, okay, because you accelerated depreciation in the past and you have these other things, working capital. So you're showing on an accrual basis that you're earning profit. So you're paying taxable— you know, you have taxable income here, but you don't have the cash because you didn't manage your cash. He ended up covering it, but he had to pull on his line of credit and it was a big wake-up call. But so many companies, they don't have access to capital like that and they could just be killed.
