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Financial Metrics

Revenue Recognition: Why Cash and Revenue Aren't the Same Thing

Understanding accrual accounting and why your 'revenue' might not be money in the bank.

• Navigator Team
revenue recognition accrual accounting cash flow SaaS accounting financial reporting

Your SaaS company closes a $120,000 annual contract in January.

You celebrate. You update your financial forecast: ”+$10,000 monthly recurring revenue.”

But here’s the question: When do you actually “recognize” that revenue?

  • Option A: January 1st (when the contract is signed)?
  • Option B: Throughout the year (as the customer uses the service)?
  • Option C: When you invoice them?
  • Option D: When the money hits your bank account?

The answer depends on which accounting standard you follow. And it matters more than you think.

The Difference: Cash vs. Accrual Accounting

Cash Accounting: You recognize revenue when money arrives in your bank.

Example: Customer signs annual contract in January. You don’t recognize any revenue until the first payment clears (maybe January 15th). You recognize $10k that day. Then you recognize another $10k when the next payment clears (maybe February 15th).

Your revenue recognition matches your cash flow.

Accrual Accounting: You recognize revenue when the service is delivered (or the contract obligation is met), regardless of when money changes hands.

Example: Customer signs annual contract in January. You recognize $10k every month (January through December) because the customer is using the service every month.

Your revenue recognition matches your actual business activity.

Why This Matters

It seems like a technical accounting question. But it changes everything.

Let me show you:

Scenario: Two SaaS companies, same actual performance.

Company A (Cash Accounting):

  • January: Collect $120k upfront from customer → Revenue: $120k
  • February through December: No new upfront payments → Revenue: $0/month
  • Annual revenue: $120k

Company B (Accrual Accounting):

  • January through December: Recognize $10k/month as customer uses service → Revenue: $10k/month
  • Annual revenue: $120k

On paper, both make $120k annually. But they look very different month-to-month.

Company A looks like it had a massive January and then collapsed. Company B looks consistent.

Investors love consistency. They’d value Company B higher even though both companies are identical.

Revenue Recognition Rules (ASC 606)

In the US, publicly traded companies must use ASC 606 (the revenue recognition standard).

ASC 606 says: You recognize revenue when you transfer a promised good or service to a customer.

For SaaS, this means:

  • Monthly subscription: Recognize $10k each month (as you provide the service each month)
  • Annual upfront payment: Still recognize monthly (even though cash came in at once)
  • One-time implementation fee: Recognize when implementation is complete
  • Refundable deposits: Don’t recognize until service is delivered (if they get a refund, you haven’t “earned” it yet)

How It Works in Practice

Let’s walk through a real example.

Contract Terms:

  • Customer signs annual SaaS contract for $120,000
  • Paid upfront (January 1st)
  • $10,000 per month value
  • 30-day refund policy (if they’re not satisfied in the first month, they get a full refund)

Revenue Recognition:

  • January: Recognize $10k (but hold back $10k as “deferred revenue” in case they refund). Revenue: $10k
  • February: Refund risk has passed. Recognize the $10k deferred from January plus the $10k for February. Revenue: $20k
  • March through December: Recognize $10k/month. Revenue: $10k/month

Cash Position:

  • January 1: Receive $120k → Cash: +$120k
  • February through December: No additional cash (it was already collected upfront)

Income Statement:

  • January revenue: $10k (even though cash was $120k)
  • December revenue: $10k (even though cash was $0)

See the disconnect? Your cash and revenue are completely different.

Deferred Revenue (The Key Concept)

When a customer pays upfront for a service you haven’t yet delivered, that’s Deferred Revenue (also called “Unearned Revenue”).

It’s on your balance sheet as a liability, not revenue.

Example:

  • Customer pays $120k upfront on January 1st
  • Balance sheet shows: $120k cash, $120k deferred revenue liability
  • As you deliver the service (monthly), you “recognize” the revenue
  • January: Convert $10k deferred revenue to revenue. Balance sheet: $120k cash, $110k deferred revenue, $10k revenue
  • February: Convert another $10k. Balance sheet: $120k cash, $100k deferred revenue, $10k revenue
  • And so on

Deferred revenue is actually a healthy sign for a SaaS company. It means customers paid upfront (good cash flow). You just haven’t “earned” it yet (still have to deliver the service).

The Cash Flow Waterfall

This is where founders get confused.

Your Cash Flow and Revenue are different:

Cash Flow: Money in and out of the bank

Revenue: Economic activity you’ve completed

Here’s how we reconcile them:

January Cash Flow:
  Cash in: $120k (customer upfront payment)
  Cash out: $50k (expenses, salaries, etc.)
  Net cash: +$70k

January Revenue:
  Subscription revenue recognized: $10k
  (Additional $110k is deferred—will be recognized over 11 months)

January Accrual Profit (Revenue - Expenses):
  Revenue: $10k
  Expenses: $50k
  Profit: -$40k

January Cash Position:
  Start: $100k
  Cash in: +$120k
  Cash out: -$50k
  End: +$170k

Notice: You have positive cash (+$70k) but negative profit (-$40k). This is normal for a SaaS company with upfront billing.

Your revenue is conservative (only recognizing what you’ve actually delivered). Your cash is strong (collecting upfront). This is actually the ideal scenario.

How Deferred Revenue Affects Your Metrics

This matters for metrics your investors care about.

ARR (Annual Recurring Revenue): How much subscription revenue you expect to recognize this year.

If you have $5M in deferred revenue that will be recognized over the next 12 months, and you’re signing new customers with $2M annual value, your ARR is approximately $5M + $2M = $7M.

(It’s approximate because some customers will churn.)

MRR (Monthly Recurring Revenue): Your ARR divided by 12.

If ARR is $7M, MRR is $583k.

Investors use MRR growth to evaluate momentum. If MRR is growing 10% month-over-month, you’re scaling. If it’s flat or declining, you’re in trouble.

But MRR is based on revenue recognition, not cash. A customer who pays annually doesn’t impact MRR every month; it’s already baked in from the month they signed.

The Cash vs. Accrual Problem for Startups

Here’s where it gets dangerous.

Most startups don’t use proper accrual accounting. They just track cash.

A founder might say: “We have $500k in the bank. We’re generating $50k revenue per month. We’ll be profitable in 10 months.”

But if they actually use accrual accounting, the picture changes:

  • $500k cash
  • $400k is deferred revenue (not actual revenue)
  • So they have $100k in “real” cash (after accounting for the obligation they haven’t fulfilled)
  • They’re actually only generating $30k per month in recognized revenue
  • They won’t be profitable in 10 months; they’ll run out of cash in 3-4 months

This is why some startups that look “profitable on paper” suddenly collapse. They confused cash with revenue.

How We Track This in Your Analytics

We build your financial dashboards to show three numbers:

1. Cash Position How much actual money is in the bank? This answers: “Do I have enough to make payroll this month?”

2. Revenue (Recognized) How much revenue did you earn this month (by accrual standards)? This answers: “How fast is the business growing?”

3. Deferred Revenue (Liability) How much money have you collected but not yet earned? This answers: “What’s my future revenue pipeline?” and “If customers churned today, how much would I have to refund?”

We also calculate a metric called Cash Runway:

Cash Runway = (Actual Cash - Deferred Revenue Liability) / Monthly Burn Rate

This shows you how many months of cash you truly have (accounting for the obligation of deferred revenue).

The SaaS-Specific Nuance

SaaS accounting is particularly important because of how customers pay.

Monthly subscriptions: Low upfront cash, but steady deferred revenue recognition

Annual upfront: High upfront cash, but deferred revenue is a liability

Quarterly billing: Moderate cash, moderate deferred revenue

Your billing model affects your perceived profitability and runway significantly.

We work with you to structure billing and accounting to be honest about your position:

  • If you’re bleeding cash, we want to see that clearly (so you can make decisions)
  • If you’re actually in good shape despite low cash, we want to show that (so you don’t panic unnecessarily)

A Word on Audits

If you raise VC funding or plan to go public, you’ll have external auditors.

They will review your revenue recognition practices. They will make sure you’re compliant with ASC 606.

If you’re not already using accrual accounting, they’ll require it. It’s better to implement it now than wait until an audit forces you.

The Takeaway

Cash and revenue are different. Your cash position tells you if you can make payroll. Your revenue tells you if your business model is working.

A healthy business has:

  • Positive cash flow (or at least not hemorrhaging)
  • Positive revenue growth (or a clear path to it)
  • Reasonable deferred revenue (obligations you’re confident you can fulfill)

An unhealthy business might have:

  • High revenue but negative cash (customers not paying, or paying very slowly)
  • High deferred revenue but low cash (upfront billing but high churn risk)
  • Low revenue and low cash (burning through savings with no clear path to profitability)

We track all three metrics in your dashboard. Together, they tell the real story of your financial health.