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okay hello and welcome to another tutorial video this one is all about SAS accounting I labeled this version 2.0 because as I describe in the next slide here this is a corrected tutorial thanks to those of you who pointed out the mistake that I made in a previous version that was posted here a few weeks ago as you may or may not know YouTube does not actually let you edit videos so if there's an error or a correction or something you want to change you actually have to delete the video lose all your data and comments and then re-upload it and that is what I have done here because I felt it was significant enough to actually do this for all the files and resources here you'll want to go to breaking into wallstreet.com KB slash Adventure Dash Capital SAS Dash accounting I'll also post a link to this right below the video pin there so you can get everything right there and this is still a short summary from our more extensive venture capital and growth Equity modeling course so I'm going to go through everything here again and I'm also going to go beyond it and give you an example of SAS Accounting in a full financial statement model we're going to start off with the distinction between bookings Billings and revenue then we'll go to a simple Excel schedule for that then we will look at accounts receivable and deferred revenue and this is actually where the mistake was last time so we'll correct that and explain why it happened and then in the last part I will take you through the income statement balance sheet and cash flow statement and show you what happens when a company bills customers records the revenue and then eventually collects the cash from the customers so let's get started with bookings Billings and Revenue bookings for a software as a service company represent the total contract value so if a customer signs a three-year contract that is worth three hundred dollars the bookings for just this customer are three hundred dollars Billings are based on invoices and they're linked to when the customer actually receives the invoice which could be once per month or once per year or twice per year or two or three times per contract if this three-year contract customer gets an invoice once per year the Billings are going to be 100 per year and the company then collects 100 in cash per year revenue is based on delivery of the product or service so the monthly Revenue equals the Billings divided by the months per invoice so in this case if the annual Billings are 100 then the annual revenue is also a hundred dollars and the monthly revenue is a hundred divided by 12 or 8.3 so that's how this works now I'm going to go through a simple Excel example here I'll refer you to the file to get all my notes and to get all the formulas I think it's a little bit easier to understand with bookings we want to show these only if we're in month zero or if we're in the start month of the next contract and we can use the mod function in Excel to test for this so let's go into our file and take a look total contract values of 120 the contract length is 12 months the invoice interval is six months so they get two invoices each year and then it takes the company three months to collect the cash so let's go in and do this for the bookings I'm going to say if or and we're going to go up to the month number here and if we're in month zero or we are in a month that is divisible by the contract length of 12 months so let's go up and take this and then let's enter the 12 for the second part of this for the divisor part of the mod function so if we're in a month that is divisible by 12 then we're going to record the total contract value right here otherwise we're going to say zero let's copy this across and see how it works and so you can see we get 120 in year one and then as soon as we get into year two month 12 this is divisible by that 12 month length and so now we get another 120 right here representing this contract being renewed or signed again for year two now Billings you divide the contract value by the invoice interval and you display this only when the invoices are actually issued which is every six months in this case we can take a very similar approach so we can take the same formula but then tweak it a little bit and so here instead of checking whether it's evenly divisible by 12 I can go down two rows and check whether we're in a month that is evenly divisible by six because that's the invoice interval in this case and if we are then we want to take the total contract value right here and then take the invoice interval and divide by the contract length so 6 divided by 12 means that we will take 50 percent of this total contract value and show it here each time an invoice is issued If This Were four months then we'd take one third of this 128 contract value and display it each time we issue an invoice to the customer so we have that and I'm just fixing the parentheses there at the end let's copy this across and now we have our Billings we get 60 in January another 60 in July and then as soon as year 2 starts we get another 60 in January and then another 60 in July so these are our Billings and then finally the revenue here is actually quite easy because it's just total contract value divided by the contract length it's quite simple assuming that the customer keeps renewing so in this case we go up and take the total contract value right here and then divide by the contract length and we can anchor both of these so it doesn't shift around and we get simply ten dollars in Revenue every single month here as the product or service is delivered and as the customer keeps renewing so that is bookings Billings and revenue let's now go to accounts receivable and deferred revenue and this is where the error actually occurred last time with accounts receivable it always takes companies time to collect cash from customers after they issue the invoice to the customers accounts receivable for a SAS company increases by the amount invoice as soon as the invoice is issued and then at the same time deferred revenue also increases by the same amount invoiced as soon as the invoice is issued and it actually balances the AR increase so accounts receivable on the asset side goes up and then deferred revenue on the liabilities and Equity side goes up and they balance each other out like that AR will remain constant at that amount invoice until the cash is actually collected at which point it goes to zero and then deferred revenue will decrease each month based on the difference between Billings and revenue or Billings minus Revenue so let's go in and start entering these formulas the first thing I actually want to do is go up here to the month number since the last billing since we have to fill this in first and I'm going to say that if our Billings here are zero then we want to take this number and then add one otherwise we'll say zero because if the Billings are zero then we can actually go back a number of months to find the most recent billing but if the Billings are some positive number it means that we just build the customer so this should actually reset to zero at that point so let's go in and set this up and make sure it works briefly first so we get zero one two three four five and then it goes back to zero one two three four five and then it keeps doing that same thing so it appears that this works correctly now for the accounts receivable let's actually start there and let's go up and start by checking the month number since the last billing if this is less than the number of months required to collect the cash three in this case then we will use an offset function and we'll go up to the Billings right here I'll stay in the same row so I'll enter 0 and then I'll go back the number of columns equal to the month number since the last billing so if it has been one month since the last billing we go back one column if it has been two months since the last billing we go back one two columns to get that actual billing number and that's what should be in accounts receivable let's just take a look at how this works you can see it starts at 60 it stays at 60 for three months and then it goes to zero when the company collects it stays at zero and then it goes back to 60 when the next invoice is issued and it keeps doing that throughout so it always goes up to this number stays at it and then it goes to zero now the deferred revenue is actually pretty simple because all we have to do is take the cumulative billing so far and then subtract the cumulative Revenue so far and I'll anchor the E part of the e19 and the E part of the E20 right there and you can see how this works deferred revenue and accounts receivable both initially go up to 60 at the start of the first month here deferred revenue decreases by 10 because of the 10 in recognized revenue and then it decreases by another 10 in the next month another 10 after that and so on and so forth and so this is the flow and this is how these items work for a software as a service company you can try changing this around you can try changing the contract length or the invoice interval or the months to collect cash or anything else like that but this is the basic idea I do think it is a little bit counter-intuitive how accounts receivable and deferred revenue work here because a lot of accounting textbooks presented differently they'll say that accounts receivable is used when a company delivers a product records the revenue but it hasn't collected the cash yet and that's true for the one-time purchase of a simple product but when you're offering subscription services and you have invoices and even recognition of a product or service delivery over a long time frame and then you have a separation between the cash collected and the invoice sent it gets a little bit more complicated and that's why it varies a little bit from that simple treatment that a lot of accounting sources reference I want to conclude by going over this three statement model example this is very similar to the interview question model that you've probably seen before in this channel we're going to go through the initial impact the impact once the company actually starts recording revenue and then what happens when the cash collection takes place so if you go over to the three statement tab over here in the same Excel file let's go in and start entering this we are tracking three months here we have a balance sheet for four months the end of month zero and then the end of months one two and three and then we have a mini cash flow statement for months one two and three so in this case we have a total contract value of one thousand two hundred a contract length of 12 months an invoice interval of four and then two months required to collect the cash so the monthly Revenue recognized is going to be the total contract value divided by the contract length the Billings in month zero are going to equal the total contract value right here and then we'll take the invoice interval and then divide by the contract length so we're essentially dividing this 1203 in this case and then the AR will go up by this initial amount invoice and the deferred revenue will also go up by this initial amount invoiced and the month number the cash collection will just be month two here so what happens let's start with the balance sheet initially AR goes up by 400 and deferred revenue goes up by 400 these changes balance each other after that the revenue starts being recognized on the income statement and we get a hundred dollars in each month in revenue on the income statement net income is now positive because the company is recording Revenue it's paying for income taxes and it's paying for expenses as well but if you go over the cash flow statement the cash flow generated is actually negative at least in month one and month three because there is no cash collection in these months so the company is paying expenses and taxes based on Revenue it is recorded but it hasn't actually collected cash corresponding to that Revenue in these periods now in month two this is when the AR collection takes place so this goes up by 400 and the cash flow generated turns sharply positive in this particular period on the balance sheet AR stays at the 400 until the cash collection takes place then it goes to zero deferred revenue by contrast starts at the 400 and then it keeps decreasing by 100 in each period as the company recognizes Revenue so that's how it works to do a quick recap in summary now bookings versus Billings versus Revenue bookings are linked to the total contract value Billings are based on the invoice dates and when the customers are invoiced and when the cash is collected revenue is based on the delivery of the product or service with the simple Excel schedule I showed you how to set up some very simple formulas here using the mod function in Excel to test when we want to display the total contract value versus when we want to display the amount invoiced and then also the amount of Revenue based on product or service delivery we went through accounts receivable and deferred revenue accounts receivable the main thing is we just have to go back to the last invoice date to get this and it'll stay constant at this number until the cache collected deferred revenue we sum up the cumulative difference between Billings so far and revenue so far and that's how we get to the deferred revenue in each period and then we went through this simple three statement model example and you saw how AR and Dr change over time how the these changes are reflected on the income statement and then what the cash flow statement impact is how it's mostly negative except for the periods in which the company actually collects the cash in full from the customer that's it for this lesson hopefully now you know a little bit more about SAS accounting and you have some good examples and Excel files to show you how this works