Good afternoon gents -
This is strictly an accounting focused question.
When looking at operating cash flow, which adds deferred revenue, can you make the case you are double-counting revenue for a projected period?
In other words, you are recognizing the revenue from deferred and also adding it to your operating cash flow number.
From what I can see, the majority of SaaS based software companies are adding deferred revenue to their operating cash flow calculations.
Thanks!
You would not be double counting revenue. Deferred revenue represents cash received upfront for products/services and is recorded as revenue on the income statement as it is earned. The change in deferred revenue represents cash inflows or outflows; therefore, it is included in the calculation of operating cash flow.
How about for forecasted periods? Example, 2017 revenue estimate that includes revenue that is supposed to be recognized from deferred revenue yet deferred revenue is being added to operating cash flow.
Think of it this way:
You start TT's Lawn Service and a customer pays you upfront $100 for a month's worth of mowing. Your accountant is going to book that $100 on the balance sheet on day 1 as deferred revenue, which is a liability. Because you charge $25 per mow per week, after week 1, you have performed $25 worth of services. Your accountant is going to reduce deferred revenue (balance sheet) by that $25 and carry it to revenue (income statement). This transfer is going to net out; on the cash flow statement, you have $25 of cash inflow that carries to the top line. In the working capital changes, you have a $25 cash outflow from the deferred revenue line, which effectively means a $0 change in cash from you performing the service. As you perform the service the remaining three weeks, the accountant will make that adjustment each week until deferred revenue is removed from the balance sheet, and your income statement reflects the revenue as the service is performed.
Does that make sense? There is no double counting. You only count it on the income statement as the service is performed. But it hits your cash flow (and therefore the balance sheet) from the moment the customer pays you that $100.
Deferred revenue does not get counted as revenue when it comes in. It's a debit to cash (asset) and credit to deferred revenue (liability). You would only be adding changes in the account as part of your net income reconciliation to operating cash flow.
Deferred Revenue & deferred income taxes (Originally Posted: 12/16/2014)
How do you forecast Deferred Revenue and Deferred income taxes?
I thought deferred revenue would be a percentage of revenue but I saw somewhere where it used a percentage of net income. What is the logical behind using net income?
And how would you project deferred income tax, given a startup-like company?
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Deferred Revenue = Debt or WC? (Originally Posted: 11/16/2017)
Hello everyone,
Let me pick your brains for a few minutes:
I just had a relatively long discussion on both the theoretical and practical aspects of the doubt expressed in the title of the topic, i.e. in a business whose working capital is constantly negative due to very significant customer deposits / deferred revenues, what are the discriminating factors to categorize this as either debt (or more precisely a negative adjustment to current cash, obviously what a buyer would like) or working capital (what a seller would like)? And would you do any adjustment to the quality of earning based on such characteristic of the business?
For the sake of this discussion, you can assume that deposits have extremely low seasonality, and that as a % of revenue they tend to be extremely constant (due to strict deposit policy). Finally, customers can't really cancel the transaction and claim the money back.
As in theory a factor could also be whether the business will ever stop and effectively crystallise such cash outflow, in pure theory this business could go on forever.
So, on a theoretical standpoint where do you stand? And on the practical side, what structure would you arrange to be satisfied as either a buyer or a seller?
Regardless of negotiation tactics, the approach that seems to be the most reasonable to me is to apply an haircut (i.e. recognize a debt) equal to the variable costs necessary to earn those revenue, but I'd be happy to hear what the forum thinks.
Thanks!
Hi TT_Lambo, just trying to help:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
Deferred Revenue Cash Implications (Originally Posted: 10/22/2017)
Recently was asked this question in an interview: what are the cash implications of deferred revenue for an O&G drilling company?
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