Deferred Revenue
Cash received from customers before the associated service or product has been delivered — a liability on the balance sheet.
Also known as: Unearned revenue, Contract liabilities, Deferred income
One-line definition
Deferred revenue is cash already collected but not yet earned — it will be recognised as revenue as services are delivered.
TS relevance — the good and the bad
Positive signal: Large deferred revenue (e.g. SaaS annual subscriptions) means cash-generative, recurring revenue business.
NWC trap: Deferred revenue is a liability; if it is excluded from NWC or understated at closing, the buyer assumes delivery obligations without receiving the cash they generate.
Treatment in NWC peg
Whether deferred revenue is included in or excluded from the NWC definition is one of the most hotly negotiated items in tech deal SPAs.
Related terms
Net Working Capital
The normalised level of working capital a target business needs to operate — a direct lever on the purchase price.
Quality of Earnings
The TS work-product that bridges reported EBITDA to a defensible run-rate figure a buyer can underwrite.
Run-Rate Revenue
An annualised revenue figure extrapolated from a recent sub-period, used when the business has grown significantly during the historical period.