Deferred revenue recognition is a tricky topic to discuss. The thing is, I complain a lot about the convolution of math and theory behind base metrics in things. Well, in the case of this thing, it’s a complicated topic, and as a result, none of those who display it in complex ways can be blamed for it.
But, I don’t like complexity, and neither do you. So, what I’m going to try to do is to explain deferred revenue recognition in a way that accurately portrays it, and is easy to wrap our minds around. This is a damn tough mountain to climb, right here. So, bear with me.
Basically, deferred revenue is a set of checks and balances usually handled in a financial sheet. It’s very complicated and very much a bean counter science in its truest form. But, basically, its purpose is to track all accounts reconciled, active, up for renewal and cancelled, which allows for the building of financial histories, current conditions and forecasts for the future.
Well, let’s simplify it just like that. Let’s consider a handful of basic items like this. We have closed contracts in the past. These are not active current revenue, but they’re historical snapshots at least.
Second, we have active contracts. These contracts were opened, and have not asked again for renewal nor have they been cancelled. These register an ARR for active customers.
Next, we have contracts up for renewal, and marked as renewal. They project a similar bit of information as the above, just for a longer time into the future.
Finally, we have cancelled contracts, which are churn. These are historical, but the trend of these can show possible near future degradation to your deferred renewal in future forecasts.
This is really all there is to this, when you boil it down. But, in its native form of being tracked and calculated, it’s quite a bit more complex in how it’s handled. But, thankfully, modern business SaaS has produced software which can handle the complicated side of this, once you know the metrics to use and what to ask for them to be used for.
This is a useful way of calculating revenue, because tracking current income or historical income with fuzzy projection are a bit of a one sided analysis on their own.
CRM software is often more than capable of calculating this sort of thing for you with minimal confusion or convolution. Salesforce famously handles this well, among others.
As for using any complicated specific calculations on these metrics, well, if you have any of those to perform, they’re very specific to your situation and are more often than not averages and ratios, which the CRM software out there also can handle very well, if it’s good CRM.
Deferred revenue recognition really is a complicated thing in its native form, but I like to think we’ve done a good job here in simplifying it. That doesn’t empower you to master its use and handling just yet, but it at least provides a base understanding of what it actually is. From here, it’s more about mastering software that handles the kinds of sheets it uses, than learning any math or disciplines of your own.
