How Deferred Revenue is Handled with a SaaS Business Model with Annual Payments

Q: I need a template for my early stage digital company based in Europe. Yours looks impressive but I need a very specific requirement. I will have SaaS revenues with payment for one year up front. That means I need a deferred income account in the balance sheet and it has to write 1/12th of that sum back to the P&L each month. Then I need a summary P&L, Balance Sheet, and Cash flow. Can your template handle that?

A: Yes it does. It’s a very important question, because it is very complicated to model this correctly and very few models get this right. Further, our model allows you to enter different billing and collection assumptions for each particular offering you are modeling (note – it is critical to be able to model each offering completely separately in order to get your unit economics correct – most models force you to model all offerings the same, but our model allows you to model every aspect of each offering uniquely to really nail it).

In terms of how to properly account for everything from the revenue recognition, cash flow, and deferred revenue, and to get all of that right on the Income Statement, Balance Sheet, and Cash Flow, our model does all of that for you with only a few inputs on your part.

Let’s say you are selling for a monthly subscription fee of your SaaS app for 100 Euros (we have all 161 global currencies built into the model and we have US GAAP and IFRS versions – you will want the IFRS version since you are in Europe) and that you are collecting one year in advance. We will only enter 10 new customers in Month 1 of the plan to more clearly show the impact of the annual in advance billing and collection option. With only those three inputs (price, sales, and AR option), the model will calculate everything else as follows:

On the Sales report, you can see the sales amount in terms of ten customers only in month one that turn into a recurring revenue stream...

Screenshot of Sales Assumptions

...and scroll down to see the Revenue Summary that shows you the impact of your three inputs in terms of net revenue recognized (only 1,000 Euros per months (10 subscribers x 100 Euros each), cash (12,000 Euros in Month 1), deferred revenue (11,000 Euros in Month 1 and declining by 1,000 of recognized revenue each month), and receivables of 0 :

Screenshot of Sales Assumptions

In addition, your IS, BS, and CF statements will all correctly reflect the above for that offering as well as for all other offerings according to their unique assumptions.

Please see this blog post for more details on all billing and collections options and how they impact your plan.