The Hidden Risks Behind Your AP Balance Sheet (Some Will Surprise You)

If your company's balance sheet is not portraying an accurate picture, you're shooting in the dark. Your finance team can't turn insights into action if the big picture is incomplete.
Written by:  Allison Reich
Last Updated:  January 30, 2023
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The Hidden Risks Behind Your AP Balance Sheet (Some Will Surprise You)

To allow for more growth opportunities, accounting and finance teams must work together to explore 'creative' accounting systems that shift current assets around. Depending on the techniques used, some methods are merely exploiting legal loopholes. Others toe the line between 'creative' and downright fraudulent. Far more often, though, an inflated accounts payable balance sheet results from incongruities in record-keeping and inefficient accounting systems.

Regardless of the underlying cause or intent, the bottom line is this: if your company's balance sheet is not portraying an accurate picture, you're shooting in the dark. Your finance team can't turn insights into action if the big picture is incomplete. When your business isn't growing, it's stagnating. To help you avoid this potentially lethal pitfall, we're going to dive into an in-depth exploration of:

  • How to recognize inflation on your balance sheets
  • How errors and different regulations can cause inflation
  • The business risks of inflation
  • How can help solve inflated financial statements.
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Recognizing inflated financial statement

As an equity shareholder or potential investor, understanding how to recognize inflated balance sheets is an invaluable bit of knowledge. The formula for calculating the inflated percentage is:

Inflation Level = (Goodwill - Brand Value) / Brand Value

Goodwill assets

Goodwill assets are usually the result of a company acquiring another business. Businesses consider them intangible assets under the long-term asset account. If the acquiring company pays more than the company's fair value, that is the target company's goodwill value. However, if the acquiring company pays less than the fair value, it has 'negative goodwill.' 

Brand value

Simply put, the brand value is the purchase or replacement value of a brand. There are several ways to approach calculating brand value, which leads to it being a highly speculative figure. Regardless of the technique used, your accounts payable, accounts receivable, cash flow, long-term debt, short-term debt, and company assets will be examined in-depth. From there, analysts will apply various financial ratios and compare the results to your competitors.

Corporations with inflated balance sheets

It's a surprisingly common practice for mega-corporations to use legal loopholes to inflate their balance sheets. For example, Tesla recently came under fire from critics when their accounts payable and other short-term liabilities ballooned to more than $3 billion. That's an increase of $425 million from Q1 of 2020. By increasing the amount it owed to its suppliers, Tesla was able to show a higher cash account balance and push forward with larger projects. 

Sometimes, entire industries are notorious for inflating balance sheets. One such industry is banking. Unlike their tech or pharmaceutical counterparts who have high-valued intangible assets that make them unique, the banking industry is a near-perfect competitive environment. Many people point to Bank of America when examining the banking industry and this practice. 

Ways an accounts payable balance sheet can be inflated

Theoretically, there are countless ways to manipulate a company's assets. However, there are two ways that are the most common. The first is exaggerate earnings on the income statement. This is done by inflating the current period's revenue and cash flow, deflating expenses, or both. The second is the exact opposite of the first. A company's revenue is deflated, and the expenses are inflated. 

Those approaches are examples of purposeful, legal manipulation to frame a company's total assets over a period of time in the desired way to attract investors and appease shareholders. But other ways that a company's financial statements can be inflated have less to do with framing and more to do with circumstance.

Changing regulations and standards

In 2016, the Financial Accounting Standards Board updated its lease accounting standards. Under the new standards, companies must record leases of more than 12 months for property or equipment on their balance sheets and liabilities. Previously, GAAP-accepted standards allowed leases to be classified as financing or operating leases. Only capital leases were required to be recognized on balance sheets. 

Now, both types of leases are required to be recognized. This change means that the balance sheets of some companies will show inflated assets and liabilities but without any real change in their equity. 

Errors in the accounts payable balance sheet

This is the most common reason for an inability to see a company's assets clearly. Errors involving transposed numbers in accounts payable, accounts receivable, or the general ledger can snowball quickly, leading to long-term problems. Often, data is misclassified; common instances include confusing long-term liabilities with short-term liabilities and vice versa. 

For companies that lack a consistent accounting system, errors of omission are the most common problem. Take, for example, the case of BlankSpaces. As this small business expanded into new locations, their processes became much more chaotic as each new location had separate purchasing processes. This led to purchases of office supplies being lost or never recorded and other accounting inconsistencies. Each location had a separate credit card for purchases, and far too often, purchases were entered under the wrong credit card.

All the chaos meant their accounts payable balance sheet was consistently incorrect, inflated in some areas, and deflated. BlankSpaces is not alone when it comes to this type of stumbling block. Luckily, their AP department realized quickly that they were headed for disaster if they didn't find a way to shape all locations into a more cohesive unit.

With, they could eliminate using multiple credit cards and consolidate all accounts payable under one umbrella. Additionally, because has already established partnerships, they're saving additional time and money by not dealing with annual memberships. 

Risks associated with inflated financial statements

There are a plethora of issues that can result from inaccurate bookkeeping and a bad account payable balance sheet. An inflated income statement may help in one area but lead to higher taxes, thereby canceling any perceived benefit. An accurate reflection of your current assets, accounts payable, and accounts receivable plays a fundamental role in forecasting, budgeting, and developing key performance indicators. But there is much more risk involved when your company's balance sheet is off. And, it goes far beyond bad forecasting.

Wasted time

time spend of staying on top of their accounts payable balance sheet was slashed from 8 hours to 20 minutes on average once they streamlined their workflow with Order. This represents a 96% reduction in time spent in that area so they could focus on attending to more important matters.

Reputation damage

While reputation is everything regardless of the business, a small business relies on this much more than a larger business. Why? Because most new small business customers come from word-of-mouth referrals. If word gets out that your small business is 'cooking the books,' customers may view that as a sign that your business is not trustworthy.

But it's not just your reputation with customers that's on the line. Inaccurate financial statements could mean traditional lenders turn you down or offer unfavorable payment terms for loans. Is potentially restricting access to the working capital you need to grow worth the risk?

Lastly, if your company issues statements of earnings to shareholders, you're really not going to want to have to say the company made significant errors. Issuing restatements that correct errors will cast doubt on your company's ability to get things done right.

Potential legal violations

A flawed accounting system can lead to serious headaches with more than just your shareholders and lenders. If your financial statements falsely convey an inflated valuation, you may find yourself in hot water with regulatory bodies. This is perhaps the number one reason to ensure you're always on top of bookkeeping issues and have accounts payable balance sheets you can trust. 

Reduced valuation

If you're creatively managing your current assets to reduce your valuation, this could harm your ability to secure the working capital you need to grow in the future. Inflated current liabilities could make it appear as though your company is deeper in debt than it really is. An erroneous cash flow statement screams that you lack liquidity. 

Poor spend management

An often-overlooked drawback of an inaccurate accounts payable balance sheet and other financial statements is that it can increase your debt levels unnecessarily. Unfavorable payment terms for loans, increased cost of goods sold, and inaccurate liquidity are all potential side effects of bad bookkeeping. Additionally, your reports will contain erroneous data that skews quarterly performance metrics or how actual spending compares to the budget. 

Faulty ROI results

One of the most powerful arguments for automating your AP process is to capture the transformation's ROI accurately. You can evaluate the returns from accounts payable automation through measurable cost reductions and rebates. It is one reason why the results will be evident much sooner than most other forms of technological transformation happening across businesses today. 

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Streamlining spend management

Whether you have a new company that is just getting started or an established company looking for ways to integrate automation with legacy technology, you must make a solid plan to streamline your spend management and improve your accounts payable balance sheet processes. Using automated end-to-end financial tools will help mitigate the risks involved with manual, flawed accounting systems.

At the absolute minimum, your AP department should be looking for these features:

  • Templates for commonly ordered products
  • Tools that reduce labor spend on account payable and accounts receivable reconciliation by a number of days every month
  • Ways to capture discounts by paying before the due date
  • Tools that lower the cost of goods sold and office supplies by helping you negotiate better deals
  • Ability to boost transparency company-wide
  • Tools to increase liquidity and working capital
  • Reports and dashboards so you can see current liabilities, total liabilities, cash flow, due dates, your accounts payable balance sheet, and other financial metrics in real-time

That is where comes in. Recruiting new talent, exploring new markets, and maximizing purchase power all depend on transparency in your financial data. Greater accuracy from the accounting department will give your finance team the tools they need to make more informed plans for growth. Seeing the big picture is impossible when pieces are missing. 

None of the risk, all of the reward

We understand the challenges you face when running a lean and agile business. Internal and external stakeholders may be hesitant to change established accounts payable balance sheet and spend management processes. Concerns about ROI, integration abilities, and ease of adoption can be at the top of the concerns list. 

But these concerns are exactly the reason is different from other spend management platforms. The return on your investment starts rolling in from the very start because there is no initial investment. Our strategic partnerships lift the responsibility of integrations off your shoulders and onto ours. Once it's customized to your business' needs, adoption is as simple as point and click. Schedule your free demo today!

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