Deferred Revenue
How the Hemrock financial models forecast deferred revenue
How to use
The Standard Financial Model and Runway Tool share a Forecast sheet component that handles deferred revenues using a standard corkscrew build.
In the core revenue and expense section on Forecast, any line can be assigned to Revenues or Billings. Revenues represents recognized revenues; billings represents what customers are billed. The sum of all revenues and billings lines is used to calculate deferred revenues. Billings increase deferred revenues, recognized revenues decrease them.
How it works
Deferred revenues appear whenever the revenues settings on Get Started create contracts where the months billed upfront is greater than one. For example: bill for an annual contract upfront in January - $100 a month, or $1,200 total - and you'll have $1,200 in billings in January, $100 in revenues in January, and $100 recognized each month through the year.
The model automatically adjusts the financial statements for the deferred revenue liability on the balance sheet and the impact on working capital on the statement of cash flows. Normal accounting separates deferred revenue into long-term (recognized beyond one year) and short-term (within one year); Hemrock models simplify this to a single deferred revenues liability.
When cash is received is separate from billings. That comes from the accounts receivable assumptions for how long it takes to collect on invoices. The model has a separate component for accounts receivable.
Why is deferred revenue growing in my model?
A common question with an easy fix. Whenever you add a revenue stream, add a line for billings alongside it. The model has a default assumption on Get Started for automatic revenue recognition that calculates billings if no billings lines are present, but best practice is to add billings explicitly. If you see deferred revenue growing unexpectedly, it's because you need to add a billings line.
Easy when billings equals revenues (e.g. a month-to-month subscription billed monthly, or ecommerce businesses where orders are billed and delivered in the same month). Harder for contracts that span multiple months; that functionality is prebuilt into the Standard Financial Model, and can be added custom into the Runway Tool.
Dealing with existing deferred revenues
If you have existing deferred revenue from the opening balance sheet on Statements, the model will attempt to forecast how to recognize revenues from it, but you will often want to add a new line on Forecast to model it discretely.
Using a custom revenue model or a forecasting tool
If you're linking in the SaaS Forecasting Tool or any custom revenue model, link in the Revenues and Billings lines. No need to link in a separate deferred revenue calculation - the model handles it automatically.
What is deferred revenue?
Deferred or unearned revenue is money received for goods or services not yet delivered. It's a liability because it represents an obligation to deliver in the future. When the product ships or the service is performed, deferred revenue transitions to earned revenue.
Deferred revenue appears on the balance sheet under current liabilities if delivery is expected within a year, and long-term liabilities if delivery extends beyond a year. As the company fulfills the obligation, deferred revenue is recognized as earned revenue on the income statement.
Deferred revenue is common in businesses where payment precedes delivery. SaaS companies often report significant deferred revenue because they collect subscription fees upfront for services delivered over the subscription period.