Established Finance

Established Finance › Industries › SaaS & Recurring-Revenue Businesses

Sector

SaaS and recurring-revenue businesses

A customer pays a year's subscription upfront. The cash is in the account on day one, but the P&L recognises it month by month as the service is delivered, and the rest sits on the balance sheet as deferred revenue. Cash, revenue and deferred revenue are three different figures for the same contract, and a lender reading the accounts cold usually only looks at one of them.

Tell us what's happening How money moves in this sector

How money moves

The cash arrives first, the revenue follows it month by month

As an illustration, a customer pays £120,000 upfront for a twelve month contract. After three months the P&L shows £30,000 of revenue from it, while £90,000 of cash already received sits on the balance sheet as deferred revenue for service still to deliver.

CashIncome

  1. Contract signed or renewed
  2. Customer invoiced and pays upfront
  3. Nothing more arrives until the next renewal

RevenueP&L

  1. Recorded as a contract liability when paid
  2. Recognised as the service is delivered
  3. Liability runs down to nil by the end of the term

Delivering the serviceCosts

  1. Payroll
  2. Hosting and infrastructure
  3. Support

Costs run every month. Cash arrives in lumps on renewal dates. The pinch comes in the months between renewals, and it is sharpest for a business still growing into its costs.

FRS 102's revised revenue section says that where a customer has paid before goods or services are transferred, the business "shall recognise a contract liability", and derecognises it and recognises revenue as it transfers them. A service is satisfied over time where "the customer simultaneously receives and consumes the benefits" as the business performs (FRC, Amendments to FRS 102, paragraphs 23.81 and 23.125).

Where the sector gets misread

What a generalist lender sees, and what's actually happening

What a generalist lender readsWhat is actually happening

Revenue growth stalling after customers move to annual plans

Cash has improved, because more is collected upfront. Recognised revenue still arrives month by month, so the P&L can look flatter for a stretch while the business is doing better, not worse.

A large liability on the balance sheet

Much of it can be deferred revenue: cash already received for service still to be delivered. It is an obligation to deliver, which a lender should weigh, but it isn't borrowing.

Recurring income as a debtor book

A renewal that hasn't yet been billed or fallen due isn't a receivable. Under FRS 102 a trade receivable is a right to payment that is unconditional, so invoice finance can't reach next year's subscriptions.

The measure that matters

Renewals and billings, not recognised revenue

The useful numbers are what customers are contracted to pay and when, how much of it renews, and the deferred revenue schedule that shows cash already collected against service still owed. Together they show whether the business can carry its costs between renewal dates.

Statutory accounts show recognised revenue and a deferred revenue balance at one year end. Walking a lender through the contract book and the deferral schedule directly usually tells a truer story than letting them read the accounts cold.

Where finance fits

A reading problem first, a funding gap second

Your situationUsually fitsNot this
Strong contracted revenue, statutory revenue looks slowerA facility sized with the contract book and renewals in viewA facility sized off statutory turnover alone
A cash gap before renewals or the next contract cycle landA credit lineInvoice finance, with nothing yet invoiced against a future renewal
A genuine unpaid invoice on a billed contractInvoice financeAssuming subscription billing never produces a real receivable
A facility can bridge the months between renewals. It can't turn customers who don't renew into recurring revenue.

This page describes the accounting mechanism generally. The treatment of any particular contract depends on its terms and performance obligations, so get your accountant's read on the specific facts.

Sources

Where these points come from

Talk it through

Need another perspective?

Describe where things stand in a sentence or two: who pays, how, and where the gap sits. We'll tell you whether it's something we can help with. There's no charge for this.

Your enquiry is read by a person at Established Finance, not a call centre or an automated queue. We use it only to work out what's likely to fit and reply to you. We don't share your details with anyone else unless we introduce you to a specialist partner, and only with your agreement at that point. Sending this doesn't appoint anyone or create a professional engagement, and there's no obligation at any stage. See our privacy policy.

What happens next

  1. A person on our team reads it against how businesses in this sector are actually paid.
  2. If we can help, we introduce you to a specialist partner we have vetted and tell you who they are.
  3. No charge and no obligation at any point. You decide whether to go further.
Adam Parker

Adam Parker

Founder of Muswell Rose Consulting Ltd, which trades as Established Finance · former Managing Director of Penny, an invoice finance business, with 15+ years across mortgages, commercial finance and fintech lending.

Last updated:

Practical questions

Before you get in touch

What information do I need?

To start, just a description of what’s actually happening in the business. If it progresses, the specialist partner will ask for the usual things: recent accounts, a sense of turnover and trading history, and details of the specific need.