What It Means (Simple Explanation)
A deferred revenue waterfall is a month-by-month schedule showing how unearned revenue will be recognized over time. It turns your deferred revenue liability into a clear forecast of future revenue.
Example
You invoice $120,000 upfront for a 12-month contract. The deferred revenue waterfall shows $10,000 recognized each month—until the full amount is earned.
Why This Matters (To SaaS & Finance Teams)
One of the most attractive aspects of recurring revenue business models is the predictable flow of revenues throughout the contract term. Deferred revenue allows finance teams to quantify the future stream of revenues over the coming months of the contract term. It tracks revenue for which payment has been made, but have not been recognized under GAAP accounting rules.
Ordway’s billing software automates deferred revenue waterfalls directly from contracts and billing schedules, ensuring ASC 606 compliance and real-time visibility into earned vs. unearned revenue.
How It Works (Break It Down Simply)
- Deferred revenue is recorded when cash is collected in advance
- The waterfall schedules revenue recognition over the contract term
- Each month, a portion of deferred revenue becomes earned revenue
- The schedule updates as contracts are modified (e.g. upgrades, pauses)
- Adjusts automatically for mid-period changes or partial invoices
Waterfalls tie directly to journal entries for deferred and recognized revenue.
Common Headaches
Many companies attempt to track deferred revenue waterfalls in spreadsheets which results in:
- Misstated revenue from manual waterfall schedules
- Spreadsheets breaking with contract modifications
- Inconsistencies between billing and rev rec logic
- Difficulties explaining rev rec timing to auditors or investors
- Lack of visibility for FP&A and board planning
Best Practices
- Automate deferred revenue waterfalls with a proper accounting system
- Use contract-based triggers to automatically apply adjustments
- Segment and track waterfalls by customer, product, and region
- Document every modification (renewals, credits, term changes) for audit trail purposes
Synchronize journal entries from the revenue subledger with the ERP automatically
When to Use Deferred Revenue Waterfalls
- For annual contracts with upfront payments
- During monthly close and revenue reconciliation
- In board decks and investor updates
- To support ASC 606 audit prep or financial diligence
- In FP&A forecasts for revenue timing
KPI Impact / What It Affects
- Accurate revenue accounting
- Successful external audit and ASC 606 compliance
- Faster close cycle
- Higher outside investor confidence
- Visibility into upcoming recognized revenue
Real SaaS Takeaway
SaaS teams with annual contracts need deferred revenue waterfalls to track the backlog of unrecognized revenue from prepaid invoices. Ordway builds real-time schedules from contract terms, billing cadence, and rev rec rules—no spreadsheet rebuilds needed at month-end.
FAQ Section (Quick Answers to Real Questions)
What is a deferred revenue waterfall?
It’s a schedule showing how upfront payments (deferred revenue) are recognized as earned revenue over time.
Is a deferred revenue waterfall required for ASC 606?
ASC 606 requires time-based revenue recognition for most SaaS contracts. Waterfalls help document that.
Can deferred revenue schedules update with contract changes?
If automated, yes. Ordway updates them automatically for renewals, terminations, and modifications.
Want to Go Deeper?
See how Ordway automates deferred revenue schedules from the moment a contract is signed—no manual rev rec workbooks, ever. Request a demo
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