Calculation Principles for Prepaid Revenue
Prepaid Revenue may also be called Prepaid MRR. Unearned Revenue and Deferred Revenue are related concepts in accrual-basis accounting.
This article explains how FirstOfficer calculates Prepaid Revenue.
How the Prepaid Revenue is calculated?
Prepaid Revenue calculation follows MRR calculation principles.
A customer buys an annual subscription 15th Jan and pays $120.
We book $10 to January and $110 to Prepaid Revenue.
We assume that service gets delivered 1st day each month. When 1st of February arrives, $10 is booked to MRR and $100 remains in Prepaid Revenue.
Prepaid Revenue does not fluctuate with month length, like Deferred Revenue in accrual-basis accounting does. Months with 28 days will carry just as much Prepaid Revenue as months with 31 days.
How often does it get calculated?
Prepaid Revenue is updated every time your metrics are re-calculated. However, you’ll see a large decrease in Prepaid Revenue 1st of each month as part of the previously Prepaid Revenue moves into MRR.
How do cancellations affect Prepaid Revenue?
FirstOfficer tracks money, not intention.
Prepaid Revenue was already paid – so unless the customer requires a refund, cancellation does not reduce your Prepaid Revenue.
How do upgrades and downgrades affect Prepaid Revenue?
In principle upgrades and downgrades are also just an intention until you charge the customer (prorate the subscription).
When the proration is made, Prepaid Revenue gets adjusted based on the changes.
There is a pitfall in charging the upgrades with Stripe and you can accidentally let customers use your service for free. Please see tip 1 in Stripe: When should I charge prorated subscriptions immediately?.