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Requirement

Prepaids can be associated with various amortization schedules based on asset type

Functional Area

Planning

Industries
All
Tags
Pre-Paids
Budgeting
Forecasting
DETAILS

Description

This entails defining and managing prepayments based on different amortization schedules that apply to various categories of assets. This feature simplifies the organization's financial planning process by providing a more detailed and accurate picture of future cash flows and budgets.

Example Use Case

Scenario: A large corporation uses Excel for its budgeting and forecasting needs. The company has various types of assets, each having different prepayment schedules. A one-size-fits-all approach in Excel leads to inaccurate forecasts.

Solution: They purchase a CPM system that allows associating prepaids with various pre-built amortization schedules based on the asset type. This allows them to include existing and planned prepaids in their forecast, more accurately valuing these assets over time and making cash expenses more predictable.

Considerations

There are many amortization types to choose from. Creating one from scratch is a hassle and will likely lead to mistakes when developing the spread. Consider the following when evaluating the CPM tool for this functionality:

Amortization Schedule Type Description and Use Case
Straight-Line Amortization Evenly amortizes the prepaid expense over its useful life, assuming uniform benefit distribution. Common for insurance premiums, rent, subscriptions.
Units of Production Amortization Based on usage or units rather than time, aligning amortization with actual usage. Applicable to prepaid contracts where services are deducted from the prepaid balance, like maintenance contracts.
Annuity Method Incorporates interest into the amortization, factoring in the time value of money. Used for significant prepaids where the time value of money is considerable, though this is quite rare.
Full Expensing Immediate recognition of the prepaid expense, contrary to amortization principles. Suitable for minor or immaterial prepaid expenses where amortization is not practical due to the short benefit period or immaterial amount.
Custom Amortization Schedule Organizations may develop a custom schedule that reflects the benefit pattern accurately. When none of the standard methods accurately represent the benefit derived from the prepaid expense, custom calculations based on specific criteria may be necessary.

Questions to Ask a Vendor

  • Amortization Schedules: Which amortization schedules are included with the product?
  • Adding Asset Type: If we need one that does not exist, how to we include it?
  • Scenarios: Can we add projected prepaids to a what-if scenario and see the impact on cash and asset values via a side-by-side comparison?