//How does deferred revenue work?

How does deferred revenue work?

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Firstly, just to clarify, by ‘Slowing Revenue’, I mean the amount the company is paid is slowing down. (Revenue being the total amount paid to the company)

Put it this way. If I have pre-orders and you’ve accepted cash for them (that is, deferred revenue) of $5mil and I’ve already used $4mil before delivering those orders, I only have $1m cash left.

If my orders dry up, but I haven’t adjusted my cost base (staff levels, inventory management, whatever else is involved), then I have a cash crunch. I either borrow from a bank (if they’ll lend to me, given my drop in revenues) or I sell off other assets.

SaaS offerings generally have a somewhat predictable flow of cash, but if people are custom ordering a product and paying up front (for example), it’s an entirely different ballgame. So while the balance sheet shows no bank loans, there are still liabilities.

NVT is a good example, and while they’re straightforward, the size of the company does make it a little difficult for a beginner.
LYL is another with deferred revenue, but they also sit on a LOT of cash, so it’s not quite the same model.