About this lesson
Explain the importance control accounts play in balancing the model when used effectively. When to create control accounts, how to create them and where to link their line items.
Understand Control Accounts
When to use
It is necessary to understand how control accounts work when building a Financial Model.
Control accounts tell you three key things:
- Number of calculations that need to be entered into the financial statement so that they balance: This is always one less than the number of rows in the control account. The reason it is one less is because the opening balance is simply the closing balance calculated from the period before.
- The order to build the calculations into the financial statements: This is always row 2 first, then row 3, then row 4 and so on. Think of it this way: assuming no opening balance (which there would not be in the beginning), if there were no sales, there could be no payments received. If there are no sales and no receipts, the difference between them (the amount owed, the Accounts Receivable) would also be zero. It is a logical order.
- It identifies the key driver: Often you want to undertake sensitivity and scenario analysis in your models, but sometimes you may be unsure which variables should be included in the analysis. Line 2 of the control account is always the key driver. As above, if there were no sales, there could be no payments received. If there are no sales and no receipts, the difference between them (the amount owed, the Accounts Receivable) would also be zero.
In the example above, if the opening balance of Accounts Receivable is $120,000 and we make further sales in the period of $64,700, assuming there are no bad debts (more on that later) and the cash received is $82,750, then the closing balance for Accounts Receivable has to be $101,950. In other words, assuming the opening balance was $120,000, entering:
- Sales of $64,700 in the Income Statement;
- Cash Receipts of $82,750 (as a positive number) in the Cash Flow Statement; and
- Closing Accounts Receivable of $101,950 in the Balance Sheet
Lesson notes are only available for subscribers.