Deferred Revenue
Also known as: Unearned Revenue, Contract Liability
Deferred revenue is cash a company has collected for goods or services it has not yet delivered, and in a deal it is often treated as a debt-like item.
Deferred revenue (also called unearned revenue) arises when a company collects payment before it delivers the product or service. It sits on the balance sheet as a liability because the company still owes the customer something.
Why it matters in diligence
Deferred revenue is common in subscription and software businesses. Buyers scrutinize it because the cash has already been collected, but the cost to deliver still lies ahead. For that reason it is frequently negotiated as a debt-like item that reduces the price paid to the seller.
The quality question
A healthy, growing deferred revenue balance can signal strong forward bookings. A shrinking one can be an early warning that demand is softening, which is why diligence tracks its trend, not just its level.