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Prepaid expenses are a common way for businesses to cover the cost of services that provide value over time. But they are slightly more complex to manage than conventional expenses. That’s because they must be allocated across the entire accounting period in order to accurately represent the asset’s contribution to the company.
To remain agile, businesses can tap into the power of financial planning software that helps them manage their prepaid expenses, track the balance of these accounts, and make adjustments as needed.
Workday Adaptive Planning offers an innovative, intuitive solution that helps you streamline prepaid expenses and provide greater oversight to your entire budgeting process. Here’s how it works.
Prepaid Expenses Streamlined by Adaptive Planning
Many enterprises already use Workday Adaptive Planning as part of their Financial Planning & Analysis (FP&A) procedures.
This cloud-based program includes tools and resources that can be used for planning, modeling, budgeting, forecasting, and more. (These features are explained in greater detail in the Adaptive Planning overview.) But did you know that your business can leverage Workday Adaptive Planning to manage and streamline these expenses?
Workday Adaptive Planning is designed to improve the budgeting process as a whole. This is partly because users gain end-to-end visibility of all their financial processes. With better access to data, Adaptive Planning empowers businesses to create prepaid expense schedules with automatic amortization of prepaid expenses.
As a result, users can manage and track the balance of prepaid expenses, ensuring that financial reports reflect the latest and most accurate numbers. And because the program connects data across multiple budgeting processes, your FP&A can be completed with pinpoint accuracy.
Prepaid Expenses Are Paid in Advance
What are prepaid expenses? As the name suggests, these are future expenses that have been paid in advance but have not yet been incurred.
Businesses often use them to cover the cost of goods or services that offer value over time. For example, when you lease office furniture or equipment — such as a copy machine — you would consider this a prepaid expense.
On your balance sheet, a prepaid expense will be listed as an asset. But here’s where prepaid expenses are a bit different from other types of expenses.
Since the asset provides value to your company over time, it should be recorded on your balance sheet for the duration of time that you use the asset. So if you lease a copy machine for 12 months, you’ll need to allocate the cost of this equipment for the entire 12 months that you use it.
Because prepaid expenses are different from conventional expenses, businesses often have to make “adjusting entries” to alter past transactions. This is done to ensure that the expense is accounted for in the relevant accounting periods.
What Is Amortization?
Amortization is the method by which you account for the use of a prepaid expense over time. So if you lease a copy machine for $18,000 per year, you can use amortization to calculate the monthly rent — in this case, $1,500 per month.
This number now becomes a rental expense each month on your income statement, and you reduce the total rental prepaid expense by the corresponding amount.
Examples of Prepaid Expenses
Prepaid expenses can include any type of future expense that has been paid in advance, including:
- Payroll
- Contractor payments
- Taxes
- Insurance premiums
- Rent payments
- Equipment paid for before use
Again, any expense can be considered a prepaid expense as long as you make a payment in advance and receive the benefit over the course of time.
The Benefits of Prepaid Expenses
Prepaid expenses offer businesses several key benefits and may even strengthen your partnership with your vendors and suppliers, including:
- The use of a good or service over time
- Avoiding a price increase for a good or service in the future
- Maximizing your tax deductions
- Possible discount from vendors if you pay up front
Most importantly, the amortization process ensures that your financial records reflect the most accurate data, so you keep your finger on the pulse of your business expenses.
Implementing Workday Adaptive Planning for Prepaid Expenses
While prepaid expenses are a common feature of most businesses, they add a layer of complexity to bookkeeping and FP&A processes. That’s why so many financial professionals have turned to financial planning software to help manage and track these types of expenses.
For one thing, Adaptive Planning provides automated amortization of prepaid expenses, which makes it easier to allocate expenses across all relevant accounting periods. But that’s just the start.
Adaptive Planning gives businesses granular insight into their data. Decision makers can analyze the details of these expenses, looking at features such as:
- Amortization values
- Lifecycle of the expense
- Expenses categorized by personnel or location
The software also enables users to gain insight into the impact of unexpected events (e.g., disruptions due to COVID, labor shortages, etc.).
Adaptive Planning also allows you to group expenses by selected attributes — creating a robust reporting option. The program can instantly calculate the cost of renewing an expense, which likewise streamlines the FP&A process.
How can your company use Workday Adaptive Planning software to manage prepaid expenses? Simply follow these four steps.
1. Identify Which Expenses Are Suitable for Prepayment
Start by identifying which expenses will qualify for prepayment. Insurance premiums are a common example, but businesses might also consider things like rent or payroll as a type of prepaid expense. If you hire a contractor, for instance, you can consider that employment contract (i.e., payroll and benefits) a prepaid expense.
Alternatively, if you purchase subscription services, you may want to automatically renew on an annual basis rather than pay by the month. Some companies even offer discounts for annual subscribers, which might be a clear indicator that you should make this a prepaid expense.
Remember: this isn’t simply a matter of convenience. Prepaid expenses can become part of your FP&A processes and even augment your tax strategy. Senior leadership should coordinate with financial personnel to identify and use them to their advantage.
2. Determine the Amount to Pay
How much do you intend to pay? This is an important question. Paying for goods, services, or bills up front has its advantages, but covering too many costs can have a negative impact on your company’s cash flow.
It’s important to find the right balance between prepaid expenses and ensuring you have the working capital to invest in other business projects.
With that being said, your vendors and suppliers may influence the amount you pay. For example, your vendors may offer a 12-month contract at a set price. But they may also extend a discount to customers who pay in advance. This may prompt your company’s decision makers to adopt this as a prepaid expense.
Additionally, if you’ve had a recent windfall of cash (or an unexpected budget surplus), you might consider investing that money directly into your business through a prepaid expense. This allows you to maximize your tax deductions without depleting your cash reserves.
3. Determine the Timeline
How long do you plan on using the asset you purchase? Some business expenses have no set end date. Rent and insurance premiums are typically ongoing, while other types of business contracts or equipment leases may be time-bound.
As before, make sure to leave yourself room to have enough working capital to manage unexpected expenses or seize new business opportunities.
The timeline relates directly to your amortization schedule. Amortization of prepaid expenses refers to the process of breaking the entire expense into constituent monthly payments. It may therefore help to take the amount you’re currently spending each month (or the amount your budget can accommodate if it’s a new expense) and multiply it by the number of months you can afford.
Your Adaptive Planning software will help you with this step. Once you determine your timeline, the program will automatically provide you with an amortization schedule. But you’ll have to start by providing a timeline that fits your company’s goals as well as your operating budget.
4. Enter Prepaid Expenses into Adaptive Planning Software
Here’s where the magic begins. In just a few simple steps, you can enter your data into the Workday Adaptive Planning software. The program can automatically calculate your amortization values and give you a comprehensive view of your budget.
Once this is complete, you can integrate your prepaid expenses into your company’s broader financial processes, including budgeting, forecasting, and financial modeling. These capabilities make Workday Adaptive Planning software a powerful tool for managing your business finances and honing your strategy for the future.
Later on, you can make any adjustments you need to keep the program (and your budget) up to date. Workday Adaptive Planning will help you analyze your financial data and make decisions about your prepaid expenses.
Should you need to alter your timeline or the amount you pay, the software can make corresponding adjustments to maintain accurate records.
The QBIX Solution
Why are so many businesses turning to Workday Adaptive Planning to help them with their FP&A processes? It’s because the software offers flexible tools to assist with a variety of business needs. Here’s how you can leverage the program to manage your prepaid expenses.
Automatically Amortize Your Expenses
QBIX leverages the power of Workday Adaptive Planning to help businesses like yours create prepaid expense schedules that automatically amortize your expenses. Thanks to Workday Expense Management, it’s never been easier to track the balance of your prepaid expenses, and it’s just as easy to protect the accuracy of your financial reports.
Make Adjustments to Prepaid Expenses
Need to make adjustments? No problem. Adaptive Planning software allows businesses to adjust prepaid expense schedules as needed. That way, your business can stay flexible while relying on data that are up-to-date and accurate.
Leverage Additional Features
But don’t forget — prepaid expenses are just one of many features offered by this advanced, intuitive program. Workday Adaptive Planning is an all-in-one software solution that augments your financial planning and procurement process.
Get the Tools You Need to Thrive
Workday Adaptive Planning by QBIX Analytics is a valuable resource for companies seeking an effective way to manage prepaid expenses. The platform balances power features with an intuitive user interface, helping your business align its finances with your strategic goals.
But that’s just the start. Workday Adaptive Planning offers a suite of robust features that put more of your business data at your fingertips. That way, you always have access to your company’s financial information and a complete picture of your financial health.
With this all-in-one management solution, you and your team can make better, more-informed decisions that propel your company forward.
Want to learn more? Contact us today and discover how these innovative tools can make your business more agile, more confident, and more resilient.
Frequently Asked Questions
Workday Adaptive Planning is an all-in-one software platform that provides tools that help businesses manage their finances.
The Workday Adaptive Planning software enables businesses to generate prepaid expense schedules that automatically amortize expenses over time.
Users gain complete visibility into their finances, and automation keeps your company’s books in order and prevents errors in financial reporting.
Yes. Users can specify the amount of the prepaid expense, designate the amortization period, and make other adjustments as needed.
Yes. Though Workday Adaptive Planning offers a robust suite of software features, users will find it easy to learn and navigate.