'Creditors are short-term liabilities that'll be settled within 12 months. This means your business needs cash available to pay the accounts in the immediate future,' explains the Practical Accountancy Loose Leaf. This means you normally need to make payment within 60 days from the date of the transaction. If this isn't managed properly, it could have strain on your company's cash flow.
While increased management awareness and supervision go a long way to improve controls, there are three creditor controls your company must implement to manage cash flow.
Implement these three levels of creditor controls to ensure your company's cash flow is properly managed
#1: Controls at management level. 'You must ensure that transactions aren't executed without your prior approval,' says the Loose Leaf. Once recording has taken place in financial records like the general ledger and creditor's ledger, you also need to ensure the information you approved has been appropriately captured.
You can do this by reviewing the creditors' listing and doing age analysis to keep track of the movements on creditors and ensure your employees follow up on overdue accounts.
#2: Controls at staff level. Don't allow your employees to approve and authorise transactions. 'They should sign documents to show they take responsibility for the information, or to acknowledge they've performed the tasks necessary for that function,' advises the Loose Leaf. This'll also help you identify who was responsible, if you have any queries. Adequate stationery controls can also assist in reducing risks.
Also beware that supplier application forms and creditor change forms create an opportunity to add fictitious creditors to the system. So distribute these only when necessary, rather than making them freely available to your employees.
#3: Controls at system level. This refers to your company's accounting systems. It's important to note that these controls will depend on the accounting system that your company uses.
Although this is the case, there are basic concepts that can be applied to most systems. These include the use of passwords, which you can use at various levels. You can use certain passwords that separate the duties of your employees.
For example, the financial manager's password will grant her greater access and give her different duties to the password for your bookkeeping clerk.
Remember, the more levels of controls you have in your business, the more assurance you have that your creditors are safe from risks like inefficient accounting systems.
Implementing these creditor controls will help your company manage cash its cash flow.