That confusing line item in your accounts? It matters more than you think

If you’re scaling a SaaS or subscription-based startup, chances are you’ve seen the term deferred revenue pop up in your accounting software, investor conversations, or financial reports.

And if your first reaction was:

“Wait… why does it look like we made less money this month when we just landed a big annual deal?”

You’re not alone.

Deferred revenue trips up a lot of founders — not because it’s complicated, but because it doesn’t feel intuitive. Especially when cash is in the bank but your revenue number hasn’t budged.

Let’s break it down.

What is deferred revenue?

Deferred revenue (also called unearned revenue) is income you’ve been paid in advance, but haven’t earned yet — according to accounting rules.

Here’s a simple example:

• A customer pays you £12,000 upfront for a 12-month SaaS subscription
• You can’t recognise the whole £12,000 as revenue in month one
  Instead, you record just £1,000 per month as “earned” revenue
• The remaining £11,000 sits on your balance sheet as deferred revenue

In short: you’ve got the cash, but you haven’t delivered the service yet — so you can’t count it as revenue (yet).

Why it messes with your head (and your metrics)

Deferred revenue often creates a disconnect between cash flow and revenue reporting — and if you’re not aware of that, it can lead to some seriously warped decisions.

You might be:

• Celebrating big wins without realising they don’t boost revenue this month
• Assuming your runway is healthier than it really is
• Confusing investors or board members with numbers that don’t seem to match your growth story

Especially when you move to accrual accounting (which most investors and scale-stage startups need), the shift can feel jarring.

You go from “cash in = revenue” to “cash in = liability.”
That takes some getting used to.

Why deferred revenue actually matters (beyond compliance)

It’s not just an accounting technicality — it’s a sign of:

• Customer commitment: If people are paying you upfront, that’s trust. That’s a positive signal.
• Predictability: It gives you visibility over future revenue you can count on, even if it doesn’t hit the P&L immediately.
• Financial health: Investors often look at deferred revenue to assess momentum and renewal likelihood.

So while it can feel like a pain at first, a growing deferred revenue balance is often a good thing — as long as you know how to interpret it.

So why does it cause problems?

The issue isn’t deferred revenue itself — it’s how it interacts with your decisions.

Here’s where it gets tricky:

• You see strong cash flow and hire ahead… but your actual revenue doesn’t support it
• You raise prices or close big deals, but your reported growth looks flat for a few months
• Your CAC payback period looks longer than it is, because revenue is spread out
• You’re not reporting MRR/ARR cleanly, because you haven’t separated booked revenue from recognised revenue
  

In other words: your metrics start lying to you — unless you understand what’s going on under the hood.

What to do about it

You don’t need to become an accountant — but you do need a few systems in place.

1. Track both cash and accrual revenue

Have visibility on what’s been collected, what’s been earned, and how they move together.

2. Separate your metrics

Investors care about recognised revenue, but you should also track bookings (closed deals) and invoiced revenue (what’s been billed).

3. Forecast properly

Build your model so that cash from upfront deals hits your bank account once, but revenue flows through month-by-month. This is especially important if you’re hiring or raising based on traction.

4. Educate your team

Founders often get this, but the team doesn’t. Make sure sales and success understand how deals translate into revenue (or don’t) so everyone’s working from the same numbers.

What investors will ask

By the time you’re at Series A or B, investors will want to know:

• Your deferred revenue balance
• Your recognised revenue vs booked revenue
• Your revenue recognition policy (especially for multi-year contracts or usage-based models)

If you can explain this clearly — and show you’ve got systems to track and forecast it — it builds trust fast. If not, it raises eyebrows.

Don’t let deferred revenue catch you out

This line item might seem dry or technical, but it plays a big role in how your startup is perceived — and how it performs.

Understanding it means you:

• Forecast better
• Spend smarter
• Communicate with investors more confidently

That’s not just good finance hygiene — it’s good leadership.