GlyphMar 5, 2023

You should absolutely go do this if you can, but, I think that this highlights an important aspect of small business / startup budgeting that a lot of people miss.

Gruber uses the phrase “already booked revenue” to describe the refundable portions of subscriptions. That isn’t (or, well, shouldn’t) be how you understand “revenue”.

A more accurate term would be “cash in the bank”, and the distinction is important.

https://mas.to/@dnanian/109970578089893239

Dave Nanian (@[email protected])

The fine folks at Tapbots and the Iconfactory need your help. If you were a subscriber to either Tweetbot or Twitteriffic, please re-install the app and click the button to decline your refund. It's difficult, perhaps, to understand what a huge impact this would make on these folks, but your effort and small monetary sacrifice will help them more than you know. More details in Daring Fireball's post: https://daringfireball.net/2023/03/tweetbot_and_twitterrific_face_the_cliff

mas.to
Show threadGlyph
When you, as a business, accept money for a prepaid subscription, you have made zero revenue. What you’ve done is increased your cash bank balance, but to balance the other side of that double-entry transaction, you have not booked revenue, you have booked a *liability* to the customer, which must be paid back in either services delivered, or money. You have made zero (0) revenue at that moment in time.
Mar 5, 2023 at 5:56pmToot!
Show threadGlyphMar 5, 2023
As each month of the prepaid subscription passes, you make transactions out of this liability — “unearned revenue” — and into your real revenue. Now, it’s not realistic to treat this cash on hand as untouchable and owed to customers. You’re not a bank, it’s not a deposit, and every customer simultaneously demanding a full refund for your service is weird enough that it’s understandable to operate as if it won’t happen. Getting prepayments allows you to make investments you otherwise couldn’t.
Show threadGlyphMar 5, 2023
For a more technical explanation of the accounting principles involved, see here https://www.investopedia.com/terms/u/unearnedrevenue.asp
Unearned Revenue: What It Is, How It Is Recorded and Reported

Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.

Investopedia
Show threadGlyphMar 5, 2023
One lesson I hope that small businesses take from this though is that you need to model *risks* to your service delivery. You *get* money when customers pay you but you only *earn* money when you deliver your service to them. Tapbots and the Iconfactory’s incentives were misaligned with their service delivery requirements.
Show threadGlyphMar 5, 2023
In the pre-muskocalypse world, it may have seemed reasonable to believe that a social media company with badly misaligned incentives (*twitter* didn’t make any money on subscriptions to tweetbot) would continue to facilitate your service delivery. But I hope this is a rude awakening for everyone depending on a free API with a single provider: they can *and will* annihilate your ability to deliver services to customers for extremely stupid reasons.
Show threadGlyphMar 5, 2023
Sometimes people (particularly free software people) want everyone to have a maximalist view of this type of risk: do everything yourself, never use a cloud, etc. That’s just unrealistic; you’d never ship anything. But you *should* manage the risk, have multiple providers, or at least verify your single provider if you must rely on one has a clear aligned financial motivation to avoid blowing up your business.
Show threadGlyphMar 5, 2023
Apple, for example, is a huge roadblock to every mobile app company who could make this kind of decision at any moment. But apple makes money when you make money, and they care about that income a lot. (Maybe alternate client vendors paid a pittance for bulk API access, but it clearly wasn’t material or strategic for them, given the panic with which they’re turning over the furniture looking for any cash whatsoever to service their crushing debt burden from the acquisition)
Show threadNoah KMar 5, 2023
@glyph sometimes “if this risk actuates then we go out of business” is the best you can do but better to at least have that written down than not.
Show threadGlyphMar 5, 2023
@coderanger having a plan for an orderly shutdown can’t save the business but it might save a lot of stress and human suffering. I hope these ISVs can pull it out though. Makes me want to buy Ivory (despite the name)
Show threadMoshe ZadkaMar 5, 2023
@glyph I thought Patrick's explanation of this was particularly good in https://www.bitsaboutmoney.com/archive/accounting-for-saas-and-swords/
Accounting for SaaS and swords

Revenue recognition for software companies is much deeper than many appreciate, and improbably implicates the age-old question "What is the economically useful life of an imaginary sword?"

Bits about Money