Deferred Revenue

Deferred Revenue in SaaS

Deferred revenue is the amount a SaaS (Software as a Service) company has billed its customers but hasn’t yet counted as actual revenue. SaaS companies don’t recognize all the revenue immediately when they bill a customer. Instead, they spread it out over the duration of the customer contract. It’s like saying, “We’ll count this money as we deliver the service, not all at once.”

Deferred Revenue Example

For example, if a SaaS company bills a customer $12,000 for a year-long service contract, it doesn’t count all $12,000 as revenue right away. Instead, it recognizes $1,000 each month as the service is provided.

Importance of Deferred Revenue

Deferred revenue appears as a liability on the balance sheet because it represents money the company has received but for services it still needs to deliver. As the company delivers these services over time, it recognizes this deferred revenue as actual income on the income statement.

Keeping track of deferred revenue is important because it provides a glimpse into the company’s future earnings. It shows how much revenue the company can expect to recognize as it continues to fulfill its service obligations. This helps in planning and predicting future financial performance.