Three numbers that move differently
When a customer signs a $120,000 annual contract and pays it all on January 1, three different things happen:
- Billings and cash go up by $120,000 in January.
- Revenue goes up by $10,000 in January, and by $10,000 every month after, as the service is delivered.
- MRR goes up by $10,000, once, and stays there.
The other $110,000 becomes deferred revenue: a liability on the balance sheet that turns into revenue over the next eleven months.
| Month | Cash in | Revenue | MRR | Deferred revenue, month end |
|---|---|---|---|---|
| January | $120,000 | $10,000 | $10,000 | $110,000 |
| February | $0 | $10,000 | $10,000 | $100,000 |
| March | $0 | $10,000 | $10,000 | $90,000 |
| … | ||||
| December | $0 | $10,000 | $10,000 | $0 |
What it does to runway
The prepay genuinely extends runway; the cash is real. But it is next year's cash arriving early, not new money appearing. Two mistakes follow from forgetting that:
- Counting it twice. A forecast that adds the prepay to the bank balance and also projects monthly collections from the same customer is double-counting.
- Celebrating it as growth. A cash spike in a board deck reads like momentum. MRR, the growth number, moved by one month's worth.
The renewal is where it bites. If the customer renews monthly next year, cash per month from them drops from “everything up front” to $10,000, while costs stay the same.
Price prepay discounts like financing
Many companies offer a discount for paying annually. That discount is a cost of capital. Offering 10% off a $120,000 contract means accepting $108,000 today instead of $10,000 at the start of each month. The implied cost of that cash is about 26% a year.
Sometimes that is still worth it: cash today can be worth more than its price when runway is short. It is a decision to make deliberately, with the number in front of you, not a default on the pricing page.
How to report it
- Show cash and recurring revenue side by side, each with its own trend, so neither borrows credibility from the other.
- Roll deferred revenue forward monthly: opening balance, plus billings, minus revenue recognized, equals closing balance. If it doesn't tie, something is misbooked.
- Report billings as its own metric when annual contracts are common. Billings growth and revenue growth tell different stories.
- Model runway on collections, not bookings, with renewal timing for large prepaid customers called out.
Common questions
Does an annual prepay increase MRR?
Only by the monthly equivalent of the contract. A $120,000 annual prepay adds $10,000 of MRR, the same as a $10,000-a-month contract. The rest is deferred revenue.
What is deferred revenue in SaaS?
Cash collected, or invoiced, for service you have not delivered yet. It sits on the balance sheet as a liability and is recognized as revenue month by month as the service is delivered.
