What is deferred revenue and is it a source or use of cash?

Deferred revenue, also called unearned revenue, is cash a company has collected for goods or services it has not delivered yet. A software company that bills a customer $120 upfront for a one-year subscription has received the cash but has not earned the revenue, so it records a $120 liability. It is a liability because the company owes either the service or a refund.

When the cash arrives, cash goes up by $120 and deferred revenue goes up by $120, with no revenue on the income statement. Each month, $10 is recognized as revenue and deferred revenue falls by $10. On the cash flow statement, the recognized revenue is in net income, but the decrease in deferred revenue is subtracted, because that revenue brought in no new cash.

So an increase in deferred revenue is a source of cash: the company collected cash before recognizing the revenue, and the cash flow statement adds the increase back in operating activities. That is why fast-growing subscription businesses can generate operating cash flow well above net income. In an acquisition model, deferred revenue matters because the buyer takes on the obligation to deliver.