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Deferred Revenue - how to explain

There's the accounting definition of deferred revenue, and then there's the definition that makes sense to your CEO/board. I'm fine on the former, but when it comes to explaining deferred revenue to non-accountants, I would like to be more articulate on what it is, what's "good" and what's "bad". With "good" and "bad" being subjective and relative to business impact, etc. Anyone have any suggestions?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

The accounting explanation, cut the the basics works well. Use the concept KISS or in other words, Think Accounting 101, not graduate school.

"If you get paid for a product or services you did not deliver, then its deferred revenue. What makes it strange is that deferred revenue is a liability account (because you owe the customer the product or services). Once the services or product is delivered, deferred revenue is decreased and revenue (sales) increases, because you now have a real sale!"

This is a simplified example that your Board can understand.

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

Deferred revenue = customer prepayments for services not yet rendered or goods not yet delivered.

The "good" is that you have use of the cash in advance and the related revenue recognition is generally predictable.

Topic Expert
Mark Sphar
Title: Chief Accounting Officer
Company: Veracity Payment Solutions
(Chief Accounting Officer, Veracity Payment Solutions) |

Jeff...I feel your pain. It is hard for us accountant types to explain accounting principles to non finance folks. Lots of books on this very topic. I agree w/ Wayne that the simplified example is the best approach based on the type of DR you deal with in your company. I think good and bad relative to business impact will depend on your company situation. Getting cash up front for a 12 months support contract and then paying out the cash for the personnel to provide the support can be seen by some owners as both good and bad. Some owners think that as soon as the cash comes in the door they get to spend it (Bad). Accountants like having the cash flow up front (Good). Owners often don't see the ongoing obligation. It is a hard concept for cash driven folks. Good luck.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Revenue is what you earn when you have delivered the goods and/or services you agreed to provide. If your delivery takes place over an extended period of time, or in multiple parts, then your revenue number must be prorated based on what you have delivered. Think annual subscription revenue spread over 12 months.

Cash is what you collect from the customer based on agreed payment terms, e.g. pay annually upfront, pay monthly in advance or in arrears. Cash flow can therefore differ from revenue flow.

Abraham Yaksich
Title: Controller
Company: Marketecture
LinkedIn Profile
(Controller, Marketecture) |

I like to think of it as a short "loan" from the customer as well. I think it puts it into better perspective for people who aren't accountants instead of just saying a liability.

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