Deferred revenue

Money received for a service you have not yet delivered. It sits in your bank account and is a liability, not revenue, until the service is provided.

Example

A customer pays £12,000 for a year upfront. On day one that is £12,000 of deferred revenue and £0 of earned revenue; you recognise £1,000 each month.

Important

Founders spend it. It is the customer's money until you have done the work, and a company that has consumed its deferred revenue cannot afford a wave of refunds.

Related terms

• Accrual accounting — Recording revenue when it is earned and costs when they are incurred, regardless of when the money moves.
• Balance sheet — A snapshot at one moment of what you own (assets), what you owe (liabilities), and the difference (equity).
• MRR (Monthly Recurring Revenue) — Predictable revenue that repeats every month from subscriptions or contracts.
• Cash flow — The actual movement of money in and out of your bank account, as distinct from revenue you have earned but not been paid.

Lessons that explain it

• Cash or accrual — the choice that changes every number — The same month can be your best or your worst depending on which basis you use. What each one shows, and why you need to be able to read both. (12 min)
• Working capital and why growth eats cash — The money trapped between doing the work and being paid for it. It is why profitable, growing companies run out of money — and it is the cheapest financing you are not using. (12 min)

All 176 terms in the Founder glossary