Managing Current and Future Impacts of Deferred Income

Paying closer attention to deferred income performance is a must. Monitoring trends and actively managing deferred income will optimize current and future management of this valuable resource. The best approach is to view deferred income as both a current period key performance indicator (KPI) and a resource to support future activities.

Deferred income (also known as unearned revenue) is generally defined as funds received by an organization for “goods or services that have yet to be provided or delivered.” Deferred income is reflected as a liability on the balance sheet because there is an obligation to fulfill a service or provide goods in the future or the funds must be returned.

Typical examples of deferred income include prepayment of workshop and event registration fees, early receipt of next year’s membership dues, prepaid rental income and prepaid advertising and sponsorship income and other similar exchange transactions where funds are received for services or goods that will be provided in the future.

To optimize deferred income’s impact on sustainability and financial health you need to separately manage current period KPIs while also managing future resource utilization. Both are equally important but involve juggling two distinct time periods. Avoid being biased to one period over the other.

Current Period Performance Management

Most nonprofits would benefit from paying closer attention to current period performance of deferred income. The first step is to set current period date-driven performance benchmarks. Nonprofits tend to over-focus on current year income goals, as defined by their budgets, to evaluate revenue performance. It is common for nonprofits to track registrations, memberships, fee incomes, etc. to budget targets. There usually is no similar benchmark for deferred income. The solution is to establish date specific dollar targets for essential revenue segments of deferred income.

For example, consider a membership organization with a $3 million budget that has a December 31 year-end for its fiscal year and membership year. If early membership renewal begins on October 1, the organization should set target performance dates for the end of October, November, and December, and treat performance monitoring and action steps just like budget year-to-date (YTD) performance reporting (e.g., October YTD: 20% = $600K, November YTD: 30% = $900K, December YTD: 50% = $1.5M).

Next, raise awareness about the extent to which the organization is relying on deferred income to support current cash flow management. You can accomplish this by building an indicator into your monthly financial dashboard reports that shows when funds received for the future are being used to support current cash operating needs. Establish a maximum target threshold for use of deferred income during times of cash flow deficiencies to help protect cash flow resources for their intended future use.

Future Resource Utilization Management

Monitoring deferred income closely allows you to pick up on trends early and adjust management strategies while you still have time to affect outcomes. Deferred income is a natural early indicator of future expected funding performance.

Actively evaluating (and reevaluating) current deferred income KPI results enables you to right-size efforts, expand marketing and promotion, and recalibrate activities when necessary to better match new funding trends. For example, an organization’s deferred income KPI results might lead it to reset discounting practices, pricing strategies, or even adjust programing and event schedules.

Planning Tip – Elevate KPI reporting for key revenue segments of deferred income. Make awareness of deferred income performance a priority in management, Board of Directors, and finance committee meetings. Add KPIs for deferred income to monthly financial reporting and have contingency plans in place to react to changing trends early when outcomes can still be impacted.

Final note: it is very common for deferred income revenue streams to be front-end loaded. In other words, most of the funds will be received during the deferral period before services and goods are provided. Consequently, if you wait until the revenue hits your income statement and budget reporting, you will miss the opportunity to actively manage performance and effect new and better outcomes.