Understanding How Any Liability on the Balance Sheet Impacts Cash:

By default, an increase to a liability on the liabilities page (as in accounting) represents a increase to cash. For example, if we take out a $100,000 loan ( a common liability) we expect our cash to increase by $100,000 while we gain a loan on our liabilities page with a value of $100,000 and a decrease in that liability (paying down the loan) typically lowers our cash balance since it takes cash to pay down a liability / debt.

"Starting Value"- If an object already existed on the balance sheet before the model start date then the fluctuations to cash for this object have already been factored into our current cash balance. This means we need to tell the model how much of this asset's current value from the balance sheet to ignore so that it doesn't fluctuate cash and show us "paying for something" we've already paid for.

Deferred Revenue Liability Explained

How to Build: This is a custom created object that consists of the following metrics:

1.Cost - Calculation > Add > Currency > [5 + 6]

2.Starting Value > Input > Currency

3.Bookings > Calculation > Add > [Add all "Bookings" metrics to this formula]

4.Annual MRR > Calculation > Add > [Add all "Revenue" Metrics that exist in the same revenue streams that you grabbed the "bookings" items from in the step above.

5.Change in Deferred Revenue > Calculation > Subtract > [3-4]

6.Last Month's Deferred Revenue > Past Value > Time Periods [1] > From Metric [1]

How it works: Basically, if you have a revenue stream / type that requires your customer to pay up front for services they expect to receive this object will ensure the full cash amount you receive up front enters the cash balance even though you are only "recognizing" / recording revenue as 1/12 of this amount each month to ensure that "revenue" is shown to match the periods where you deliver your services.

If you can imagine that a customer paying up front for a year's worth of services can only receive a month's worth of services at a time then you can imagine that if that same customer decided to request a refund 3 months into receiving your service they would need to be refunded the remaining 9 months they haven't yet received in services because they paid for a year's worth of services up front in an annual subscription.

Your deferred revenue liability is simultaneously ensuring (by increasing the liability value) that the full amount paid up front is reflecting properly into cash (since the increase of a liability value reflects an increase to cash) and also representing the decrease in the amount you would owe the customer in a refund by subtracting the revenue you "recognized" each passing month as more and more service are performed against the package of services the customer paid for up front.

Accounts Payable

Linked to your Non-COGS expenses by default, the accounts payable object uses the "Days Payable" metric divided by 30 to determine what portion of the current expenses you expect not to pay for in the billing month.

For example, if you have 30 days payable then the liability value will be equal to all of your non-cogs expenses X (30 days payable / 30 days in a month). If the expenses would have been $100,000 then 100K X "1" = a liability value of $100,000. Because our cash balance automatically assumes that every expense is ordinarily deducted then by increasing this liability's value by the amount of expenses it essentially adds the $100,000 the cash balance ordinarily takes out to pay those expenses BACK into the cash balance which negates the transaction or "delays" paying that month's expenses by 30 days (hence the "days payable").

The value that goes into days payable is usually equivalent to your payment terms given to you by your vendors if you don't ordinarily pay your vendors within the same period. For example, if you have 45 days to pay from the date you're issued an invoice, the days payable is "45".

Long Term Debt

This object is used to input interest bearing loans into the model. This is not the same as a convertible note. If you are attempting to put a convertible note into the model we recommend adding an "Investment Object" into the equity section to represent the convertible note since these are, usually, ultimately paid out as equity.

To be considered interest bearing debt you need to have interest that it being paid out in excess of 0%. If interest is 0% for a time and then begins being paid later, you actually want to add a custom liability object to represent the static amount on the balance sheet and then have a long-term debt object begin when the interest payments are expected to start. Having the "no-interest" period object end in the same month the "long-term debt" object begins will ensure that the increase in cash is accounted for but that you aren't double counting the loan.

Custom Liability

This is typically created and renamed to reflect any liability types that aren't available explicitly from the dropdown list you see when clicking "Add Liability".

The most common type of custom liability is Deferred Revenue (explained above) and then "Credit Cards" ( a short term, fixed payment current liability).

To make a liability with a balance that decreases evenly each month you would create a custom liability, add in it's liability value and add a growth assumption to decrease liability value by some number of "Units" rather than "Percent" each month. The units in this case are the payment amount in dollars.

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