Mostly Controllers: Why We Get Excited About Deferred Revenue (a Liability)

The CFO role has evolved faster than the tools built to support it.

Most finance teams are still running infrastructure designed for a job that no longer exists. The reporting. The reconciling. The close that bleeds into the next month. That's not finance - that's overhead with a title.

Agentic Finance shouldn't multiply your output - it should eliminate the work that was never worth doing in the first place.

That's why I run Mostly Media on Brex - an intelligent finance platform with AI-powered agents that do exactly that. Expenses handled automatically, policy enforced before the spend happens, books closed in minutes. So I can spend my time on the work that actually moves the business.

Hey I'm CJ and I'm a CFO. What I'm not is a CPA. I think I actually got a B- in my managerial accounting class at BC.

So why is a non accountant kicking off a series of posts specifically for Controllers? Well, I'm def not here to tell you how to be an accountant.

(I still don’t understand lease accounting. But to be fair… does anyone really understand lease accounting?)

I'm writing this as a translation layer between the work you do and the decisions that are made off of your work. This probably doesn't come as a shock, but there's a lot of derivative “stuff” made from the financials you produce. The remixes come from CFOs, Investors, and Acquirers.

In many ways, the finance and accounting department functions as a conveyor belt. Controllers are the operational engine that takes each atomic unit (receipts, billings, accruals) and weaves it into a mosaic of financial statements at the end of each month. Then the FP&A team uses those financials to figure out if you made more / less than you expected, and how much you spent to do it. And finally, the numbers are morphed into a slightly different set of numbers for decision making by CFOs, Investors, and Acquirers (revenue becomes ARR, renewals become net retention, payroll dollars become the basis for forecasting new hires… basically all the ish Mostly Metrics talks about week to week).

In many ways, finance and accounting speak the same language, but in different dialects.

I want to teach you the dialect of CFOs (and their stakeholders) so you can expand your reach along that conveyor belt.

Once again, you will not get any GAAP party tricks.

What you will get is one nuanced topic, simply explained, in a way that makes you better at your job.

The world doesn't need another CPA guide. But it does need more kickass Controllers and accounting leaders with full business model fluency to fuel all the ambitious investor backed businesses emerging.

Before we dive into our first issue:

Why is the biggest thing we owe framed as the biggest thing to believe?

Many an accountant has been dumbfounded as they watched their CFO salivate over the large, meaty, perhaps even daunting mountain of performance obligations they’ve stacked up. This is all too common with multi year SaaS contracts, piled like bodies on your balance sheet, especially those with ramp periods ($100K in year 1, $200K in year 2, $300K in year 3).

I’m here to tell you why it’s actually the most confidence inspiring number you can produce, despite it showing up in the liability column.

But first, let’s do a quick refresher Deferred Revenue and Remaining Performance Obligations.

Deferred Revenue represents money a company receives in advance for products or services that will be delivered in the future.

RPO includes Deferred Revenue, and then goes a step further, to also include unbilled revenue that’s contracted but not yet invoiced.

Deferred Revenue moves from the balance sheet to the income statement as the service are provided. That means that RPO must pass through Deferred Revenue on the balance sheet to turn into Revenue on the income statement.

And since we all know that revenue is commonly reflected as ARR (annual recurring revenue) in SaaS reporting here’s the relative order of magnitude:

RPO > ARR > Deferred Revenue

I bring this up because it matters for the parties who care, which we’ll get into in a moment.

Why is your CFO confessing bragging?

From an operational perspective, CFOs love deferred bc it’s the cheapest money available. When billed and collected upfront, they can use that cash to pre fund the company’s growth. It’s negative working capital and effectively interest free financing.

As such, CFOs watch deferred revenue like hawks, especially when the company is still burning money, because it helps them hire ahead of their sales maturity curve. They can essentially plow more money from the sales they’ve made, but haven’t delivered, to go and hire more sales people (to go and sell even more deals).

In many ways, your deferred revenue is the main driver in your hiring roadmap.

CFOs also care because it’s a supporting character in the story they tell to investors. Finance leaders are essentially using Deferred revenue (and RPO) as a way to “derisk” the company’s narrative, showing that they are “actually a lot bigger than you think”, and argue for a premium valuation.

As I often discuss on Sundays, company valuations in the tech world are often expressed using a shorthand multiple for Next Twelve Months Revenue (NTM Revenue). The faster a company is growing (and the more contracts they’ve secured into that future), the further ahead an investor is willing to underwrite and give them credit for. And that evidence lives in deferred revenue and RPO.

Speaking of investors…

Investors drool over deferred revenue because they are making a bet that you’ll be a going concern and still delivering services (in fact, many many more services) in the medium term future. They are incentivized to make bets about the future, and the liability accounting books is merely a calendar event that will eventually turn into a pumpkin.

An accountant’s version of “risk” and an investor’s version of “risk” live in different zip codes.

They are backing into a formula:

Throw in a few simple growth rates and check if billings growth is actually faster than revenue growth. If so, the business is accelerating faster than the P&L is letting on.

On the other hand, if deferred revenue is shrinking, the company may have a sales slow down (or a churn) issue on their hands.

Things they look for:

So deferred revenue, while a liability, is often perceived as an “asset” the investors are willing to give you credit for.

Acquirers typically take a less generous view of deferred revenue, and will try to recoup some of the value of those contracts.

Their logic is annoying, but also, like, fair.

They will argue that you already collected the cash on the deal (true) and the business is typically being purchased on a cash free, debt free basis. Therefore, they are on the hook for servicing those contracts but won’t get the benefit. So they will push to treat your deferred as debt, and knock down the price of the business by some ratio on the cost to service it (if your gross margin is 80%, they may take your deferred revenue and subtract the balance x 20% from the purchase price).

So in a strange way, the exact number investors reward you for, acquirers ding you for.

So what’s the story?

Wishing you a deferred balance that grows faster than the revenue underneath it,

CJ