Cash flow for entrepreneurs part V – revenue recognition
Cloud and SaaS (software as a service) are business models that many companies aspire to. But the business model that makes a SaaS company stand out to investors is not well understood by company founders, even though a few minutes looking at the financial details of classic SaaS companies such as Salesforce.com or WorkDay would make it plain.
The financial model revolves around revenue recognition. SaaS companies can’t recognise all their revenue up front, even if they have received the cash from customers. This leads to the unusual position of their profit lagging their cash flow. We use Blue Prism, a UK company, as a case study, and also briefly look at the dangerous alternative of recognising revenue too early, which led to the rise and subsequent fall of Quindell.