Preparing and Using a Creditors Control Account to Help Your Businesses Cash-Flow

The effective use of a creditors control account can really benefit your business but likewise if you do not manage it then your creditors control account can really adversely affect your businesses cash flow.

The creditors control account is a method whereby using credit terms offered by your supplier you can increase your purchasing capabilities and even be able to purchase stock and sell it before you need to pay for it. If your customer pays you when you make the sale this can give you a good positive cash flow, however as with most good ideas there is often a downside and in this case the downside is if sales are slow or you buy too many items of a particular product line that you cannot sell before they need paying for you compound the cash flow problem that you are trying to assist, also if profit levels are not high enough to cover your fixed business expenses then the business expenses erode your profit and leave you in a negative cash flow situation.

The creditors control account is created when we make a purchase and do not pay for the goods immediately. In this case our double entry bookkeeping entries are to debit the expense which in this example is stock purchases and we need a credit of the same size to balance our account and this credited posted to the creditors control account. When we pay the debt off (I am assuming in this example that we pay it out of the business bank account) we need to reduce the value of the creditors control account and we know that to lower the value of a liability we use a debit and we also need a credit and this is posted to the business bank account to the same value this follows the double entry accounting principle of an equal sized credit to balance the debit

One thing you need to really appreciate is unless they are badly managing their own business your suppliers will only extend credit terms to your business if they feel there is a reasonable prospect of this debt being repaid and as such one thing you must always ensure is you do not breach the terms of this credit, so this means do not let the credit limit be exceeded and repay the debt within the agreed timescale for repayment.

One very important way to ensure your cash flow is not negatively impacted by an unexpected bill becoming due for payment when you are not expecting them is to monitor the account situation on a frequent and regular basis. This really means keeping good accurate business bookkeeping records.