Managing Prepaid Expenses

Prepaid Expenses

Avoiding prepaid expenses can help you in enhancing and maintaining a favorable cash flow. Prepayments generally occur when the period for which a certain payment is made, wholly or partly overshoots an accounting year. Subscriptions, vehicles licenses, all types of insurance payments, local rates and taxes, rents, leases and royalties comprise the most common accounts that are carried forward as prepayments. In such cases, consider making payments monthly, quarterly or bi annually instead of annually. It needs to be done wherever possible as long as the payments remain pro rata. However, If there is some benefit of a special discount or come other advantage accruing to the organization by making an annual payment rather than (say) 12 monthly installments or 4 quarterly payments, such cases would have to be considered separately on a case by case basis. Common examples of such situations are subscriptions for newspapers, magazines and periodicals and to professional institutions.

Deposits ( Deposits are liabilities for the bank!)  too are classified under current assets along with prepayments. However, unlike prepayments, deposits are most often mandatory and therefore cannot be avoided. The best you can do is to keep track of all recoverable deposits and call for their refund immediately their purpose is done or their period of validity expires.

Salary advances is another form of prepayment to be discouraged. Your employees could be educated on the benefits of taking a bigger packet home rather than drawing it in small installments.

Taxes generally come to big amounts. Missing to claim tax benefits on certain expenses or adopting an incorrect rate could cost you dearly in terms of cash flow. Due to this reason, taking every possible care in the accurate computation of your tax liability cannot be over emphasized. Overpayment of taxes arising from incorrect tax computations, once detected, invariably end up in a balance sheet as tax prepaid.