Note:  For many businesses, a lot of cash is tied up in inventory, so it’s not hard to see how you could have taxable profits but no cash! -- John Krech.

Your business has several silent partners: Uncle Sam and his state and local cousins. Many of the decisions you make on a daily basis will impact their take, so it’s wise to be at least somewhat familiar with the tax laws when you run your own business.

One of the most important financial metrics for most businesses is “How much cash did we generate?� However, business owners sometimes do not realize how much taxable income (not cash income) their business generated during the year. Then, at the end of the year, they get a tax bill that they do not expect. This can wreak havoc with cash flow and business growth plans.

Here are a few of the situations that can cause this, and some ideas for how to deal with them.

Your business is required to pay taxes based on the accrual method of accounting, but you’re keeping your books on the cash method.

Under the accrual basis of accounting, you must record income when you make a sale, not when you get paid. In general, this applies to any business that sells goods from its own inventory such as retailers, wholesalers, distributors, and manufacturers. However, the amounts you pay out for inventory are not deducted from your net income until the inventory is sold. For many businesses, a lot of cash is tied up in inventory, so it’s not hard to see how you could have taxable profits but no cash!

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