What is deferred revenue?

Deferred revenue is most common in subscription businesses. When a customer pays $1,200 for an annual SaaS subscription at the start of the year, the business has the cash but has not yet earned it — it owes the customer 12 months of service. That $1,200 sits as a liability and is recognized as revenue at $100 per month as the service is delivered.

For AR purposes, deferred revenue is the mirror image of accounts receivable. AR represents revenue earned but not yet collected. Deferred revenue represents cash collected but not yet earned. A growing SaaS business often has both: a large deferred revenue balance from upfront annual payments, and a rising AR balance from customers on monthly invoicing. Keeping the two distinct matters for cash-flow planning — the cash sitting in deferred revenue is already spoken for, even if it is in the bank.