Negative working capital due to deferred revenues
I keep seeing that deferred revenue makes working capital negative. How can this be the case? When putting deferred revenue on the balance sheet as a curr. liability, aren't we always recognizing the same amount of $ as cash (ofc a current asset)? So, since we are always recognizing the same amount of cash and deferred revenues, when deferred rev is recorded we don't have a decrease in NWC. In fact, as soon as we start to deliver the goods (nice) for that liability, our cash balance will become greater than our deferred rev as it's written down, so deferred rev would go from having 0 affect on NWC, to a more and more positive effect. Am I thinking about this wrong?
Cash isn’t included as a current asset.
So typically when people refer to NWC, they are referring to operating NWC?
Yes
NWC is typically considered on a debt-free, cash-free basis. Ngative NWC is common for businesses that have a lot of subscription revenue, deferred revenue, etc.
Quidem dolorum quis sunt. Aspernatur neque maiores reiciendis quidem praesentium. Assumenda nostrum libero expedita ipsa consectetur sequi.
Ad ratione aut molestias. Rerum voluptas rerum odio ipsam in ut. Inventore dicta dolor cupiditate ut numquam excepturi sapiente. Id qui tempora unde eius sit ipsum et. Accusamus expedita libero rerum et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...