Plan for the impact of prepaid expenses on cash
A significant prepaid expense can greatly impact cash, so it make sense to plan for the timing of known cash payments as well as the corresponding amortization. For example, insurance is typically paid upfront and amortized over the policy period.
To plan for an annual prepaid insurance policy, follow the steps below:
- Add the Prepaid Asset & Define the Properties
Go to Plans > Drivers > Locate CapEx Assets* > ... > + Add Asset and input the properties
*Although the table is named CapEx Assets, this table can be used to model the purchase of any amortizable asset- Name: Reference field for the Driver in Step 2
- Asset & Asset Contra Account: Choose the Prepaid Balance Sheet account for both
- Expense Account & Department: Periodic Insurance Income Statement account & department
- Amort Period: 12 (months)
- Asset Cost: Insurance Premium $
- Add a Driver to Trigger the Purchase of the Prepaid
From Plans > Drivers > Locate CapEx > ... > + Add Driver and populate the Driver- Name: Prepaid Insurance
- Asset: Name of CapEx Asset from Step 1
- Output Type: Incremental
- Driver & Rate: Constant of 1
- ƒx=x
- Round: None
- Freq=12
- Start=Date first premium to be paid
- End=Max Date
- All other fields can remain with default settings
This will trigger the insurance policy to be purchased in the month of the Start and then renew the following year. We can then immediately see the impact of the prepaid insurance on both the Income Statement & Balance Sheet.
