This is an older question on this forum but am unsure what correct answer would be.
Let's say the date is 1 Jan 2018. You are a business with one customer, a 2year software contract with $100M ACV. The contract starts 1 Jul 2018. Walk me through the 3 statements for this year. Now walk me through 3 statements assuming the date is 1 Jan 2019.
Now, walk me through the three statements assuming the date is 1 Jan 2018 and the contract starts 1 Jan 2018 as well. What are the differences based on contract start? Why does that matter?
.
The question is designed to get at the differences in annual cash flow based on whether something is recognized mid or beginning of year based on contract date, and that the rest is couched in deferred revenue. This can affect valuations for unsavvy investors. You should really get comfortable with this question because this was the hardest one I had over tons of interviews.
Based on the most helpful WSO content, here's how to approach this SaaS PE technical question:
Scenario 1: Date is 1 Jan 2018, contract starts 1 Jul 2018 (2-year, $100M ACV)
Income Statement (I/S):
Cash Flow Statement (CFS):
Balance Sheet (B/S):
Scenario 2: Date is 1 Jan 2019, contract started 1 Jul 2018
Income Statement (I/S):
Cash Flow Statement (CFS):
Balance Sheet (B/S):
Scenario 3: Date is 1 Jan 2018, contract starts 1 Jan 2018
Income Statement (I/S):
Cash Flow Statement (CFS):
Balance Sheet (B/S):
Key Differences Based on Contract Start:
Timing of Revenue Recognition:
Deferred Revenue Impact:
Cash Flow Timing:
Valuation Implications:
This question tests your understanding of revenue recognition, deferred revenue, and their impact on financial statements. It’s crucial to grasp these concepts for SaaS PE interviews.
Sources: Accounting question on Deferred Revenue, PE recruiting technical questions (software specific), PE recruiting technical questions (software specific), Net working capital and deferred revenue, SaaS Deal., DCF Modeling Course ~ Pre-training text.pdf
When are you assuming the customer is billed - upon signing or upon implementation/launch? Both are common. You also need to bifurcate annual upfront versus monthly billing. I can run some permutations in a response, probably tomorrow morning.
Thank you! Let’s assume annual upfront and paid upon signing. Perhaps can assume monthly billing and paid upon launch as another permutation. Great to see SaaSChimp
Here's the three permutations I considered. Only flag, in scenario #1, sometimes it's negotiable/debatable as to when the client prepays again (at contract anniversary versus launch anniversary, etc.).
Edit: My paste-out was too small. Here's a link instead, pardon the bad formatting. I never use Sheets.
https://docs.google.com/spreadsheets/d/e/2PACX-1vTWfu-4Lo79P2i6tm9H0DVp…
Why is cash / DR 1,200? Isn't it $100M ACV so wouldn't $8.3M (100 /12) get recognized every month instead of $100M?
Sorry I got lazy and assumed an ACV that was easier to spread across months (i.e., $100 x 12) - my bad, forgot his example was $100.
Voluptatem necessitatibus dolores et eligendi cumque. Sit sunt quas incidunt. Quos tempora qui impedit quisquam aut commodi voluptas.
Dolorum et et et repellat aut in eos. Dolorem sed consequatur tenetur atque. Ab reiciendis molestiae earum culpa ipsa.
Et et itaque hic alias et quibusdam. Saepe deserunt aut minima eos ea facere voluptatem. Quibusdam et maxime neque est sed et praesentium.
Totam sit quod voluptatem. Voluptatem eaque impedit et et quam delectus in iusto. Velit dicta minima molestiae quaerat iste. Aut vel aut doloribus a non ipsum consequuntur.
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...