The Basics of Financial Manipulation for Small Businesses
/The Basics of Manipulation
Understanding the distinction between expenses and expenditures is crucial. An expense immediately reduces a business’s accounting-based profits, whereas an expenditure reduces its cash balances but may not impact net income. Payors often exploit these definitions to misrepresent their financial situation.
Common Manipulation Tactics
Accelerating Debt Payments
Tactic: Payors may accelerate repayments of business debts to reduce apparent cash flow.
Impact: Temporarily decreases cash available for distribution, misleading the court about the payor’s true financial capability.
Accelerating the Purchase of Capital Assets
Tactic: Purchasing unnecessary capital assets just before a support hearing.
Impact: Reduces cash reserves, creating a false impression of lower financial health.
Accelerating Payments to Vendors
Tactic: Paying bills and invoices earlier than usual.
Impact: Reduces available cash, making the business appear less profitable.
Deferring Collection of Accounts Receivable
Tactic: Delaying the collection of payments from customers.
Impact: Decreases cash inflow, artificially lowering cash availability.
Excessive Inventory Purchases
Tactic: Buying more inventory than necessary.
Impact: Ties up cash in inventory, reducing distributable cash and distorting financial health.
Prepaying Expenses
Tactic: Paying for goods and services in advance.
Impact: Reduces current cash flow, creating the appearance of a less liquid business.
Writing Off Obsolete Inventory
Tactic: Declaring inventory as obsolete.
Impact: Increases cost of goods sold, reducing net income.
Not Accurately Counting and Valuing Ending Inventory
Tactic: Understating inventory levels.
Impact: Inflates the cost of goods sold, reducing reported net income.
Loaning Money to Third Parties
Tactic: Lending business funds to third parties.
Impact: Lowers available cash flow, potentially writing off these loans as uncollectible later.
Accumulating Large Cash Reserves
Tactic: Retaining unusually large cash reserves.
Impact: Reduces cash available for distribution, falsely indicating lower liquidity.
Paying Obligations Immediately That Are Typically Deferred
Tactic: Paying obligations like bonuses immediately instead of deferring them.
Impact: Results in two years of expenses being paid in one year, lowering apparent cash flow.
Case Study: Mr. Deceitful
Consider Mr. Deceitful, who manipulates his business's financials to reduce support obligations. By accelerating debt payments, purchasing excess capital assets, and deferring income, he creates a misleading financial picture. His strategy includes:
Paying off $2 million in bank debt.
Accelerating $1 million in capital asset purchases.
Paying vendors $500,000 early.
Over-purchasing $500,000 in inventory.
Deferring $250,000 in receivables.
Prepaying $250,000 for future goods/services.
These actions temporarily reduce the apparent cash flow, misleading the court about his true financial capacity.
Addressing and Uncovering Manipulations
Forensic Accounting
Utilize forensic accountants to uncover these tactics by analyzing financial statements and transactions.
Legal Definitions
Understand statutory definitions of income and expenses to accurately assess financial situations.
Thorough Investigations
Conduct thorough investigations to differentiate between legitimate business expenses and manipulative expenditures.
Conclusion
Recognizing and addressing these manipulative tactics is crucial in family law cases. By understanding the common strategies used by payors, legal professionals can better advocate for fair support orders that reflect the true financial situation. Ensuring transparency and accuracy in financial reporting protects the interests of both the support recipient and the involved children.