Net working Capital in SaaS
I learned that "NWC = Inventories + receivables - payables". Everyone is stating that SaaS companies do have negative NWC, due to the deferred revenue.
However, since when is deferred revenue part of NWC? Or is this due to payables?
NWC= CA - CL. Deferred revenue would be part of current liabilities and would result in some cases in negative NWC because the company received the money but have not performed the service.
I think that what’s key here as well is that the deferred revenue in this case will have to result in outflows in less than one year , and therefore be in current liabilities instead of long term liabilities. I am imagining this is a scenario where a software company collects the cash at the beginning of a 6 month subscription (e.g in this example the customer pays upfront for 6 month subscription), acknowledges DR, and then the customer gets the software during the 6 months. NWC goes down at the beginning, and then , and someone correct me if wrong here , goes up when the liability goes down and retained earnings (?) go up after the 6 months ?
This is why you have ST DR and LT DR
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