READING THE P&L PROPERLY 102: Revenue You Can't Actually Spend

Revenue You Can't Actually Spend

The founder sat across from me last week, walking through Q2 results with the kind of confidence that comes from a clean top line. Revenue had closed at ₦47 million for the quarter, up from ₦31 million the year before. The growth story was real. The bank account told a different story: ₦11 million in cash, down from ₦14 million at the start of the quarter, despite the revenue jump.

"We're growing," he said. "Why does it feel like we're running out of room?"

The answer was in the revenue mix. Two-thirds of that ₦47 million had been recognized under a twelve-month contract structure, billed annually in advance but delivered monthly. Accounting standards required him to recognize it as earned revenue over the service period, which meant the P&L showed ₦47 million, but the cash had come in unevenly across two quarters, and a large portion of what the P&L called "revenue" this quarter was actually cash that had arrived months earlier and was now already spent.

He was reading revenue as if it were cash. It wasn't. The P&L had done exactly what it was supposed to do under accrual accounting, and in doing so, it had masked a timing gap that made the business look solvent in March when it was three months from a working capital problem.

This is what Part 2 of this series is about: the revenue you can't actually spend, and why the P&L's top line is often the least useful number on the page when you're trying to understand whether a business can fund itself through the next quarter.

A shorter version of this post appears on LinkedIn, but the full structural explanation, the worked examples, and the second-order effects, live here.

Why Revenue and Cash Are Not the Same Thing

Accrual accounting exists for a reason. It's designed to match revenue to the period in which it was earned, not the period in which cash changed hands. This is useful for understanding economic performance over time. It's also the reason founders get blindsided by cash shortages in quarters when revenue looks strong.

The gap shows up in three common structures:

Deferred revenue: You bill a customer today for a year of service. The cash arrives now. The revenue gets recognized monthly over twelve months. Your P&L this month shows one-twelfth of what your bank account received.

Accounts receivable: You close a deal, recognize the revenue immediately under the contract terms, but the customer pays on Net 60 terms. Your P&L shows the revenue this quarter. Your bank account shows it next quarter, if the customer pays on time.

Milestone-based recognition: You're halfway through a project. Accounting standards say you can recognize half the contract value as revenue. The contract says you get paid when you deliver. Your P&L shows revenue. Your cash account shows nothing until delivery.

None of these are accounting tricks. They're standard practice, applied correctly. The problem is that the P&L, read in isolation, gives you no signal about which kind of revenue you're looking at, or when the cash that funds your operation is actually available to spend.

The formula that matters here is not complicated, but most founders don't track it explicitly:

That first term, cash from operations, is not the same as revenue. It's revenue adjusted for timing: revenue minus the increase in receivables, plus the increase in deferred revenue liabilities, minus the decrease in payables. The P&L does not show you this. The cash flow statement does, but most founders don't read the cash flow statement, or they read it once a year when the accountant sends it, not every month when decisions are being made.

The Structural Consequence: Growth That Weakens You

Here's the second-order effect that catches people: if your revenue is growing, and a significant portion of that revenue is recognized before cash arrives, your working capital gap grows with your revenue.

Let's work through a real example, using round numbers to keep it clear.

You run a SaaS business. You bill annually in advance. You close January with ₦10 million in cash and ₦8 million in deferred revenue liability on the balance sheet (cash you've received but haven't yet earned). Your monthly operating expenses are ₦3 million.

In February, you close ₦15 million in new annual contracts, all paid upfront. Your P&L for February will recognize ₦1.25 million in revenue (one month of the twelve-month contracts). Your cash account increases by ₦15 million. Your deferred revenue liability increases by ₦15 million. So far, you're fine. You have ₦25 million in cash, minus ₦3 million in expenses, you close February with ₦22 million.

Now March. No new sales. You recognize another ₦1.25 million in revenue (the second month of those contracts). You spend ₦3 million in operating expenses. Your P&L shows ₦1.25 million in revenue and a ₦1.75 million loss for the month. Your cash account drops by ₦3 million, from ₦22 million to ₦19 million.

April, same story. Revenue ₦1.25 million, expenses ₦3 million, loss ₦1.75 million, cash drops to ₦16 million.

By June, if you haven't closed another large upfront deal, your cash is at ₦10 million, exactly where you started in January, even though your P&L has shown ₦6.25 million in recognized revenue over those five months. The revenue was real. The cash was real. But the cash came in February, and you've been spending it every month since, while the P&L spread the revenue recognition evenly across the period.

This is not a problem if you close new contracts every month at a rate that matches or exceeds your burn. It becomes a problem the moment your sales cycle slows, because the P&L will keep showing revenue from old contracts while your cash account runs down in real time.

The formula that governs this is the change in deferred revenue:

When deferred revenue is increasing (you're collecting more cash upfront than you're recognizing as earned), cash is higher than revenue. When deferred revenue is flat or decreasing (you're recognizing previously collected cash as revenue), cash is lower than revenue, or at best, equal to it.

Founders who don't track the deferred revenue balance month to month miss this. They see revenue growing on the P&L and assume cash is growing with it. It's not. Cash grew in the month you collected it. Revenue is growing now, months later, as you earn it.

The Receivables Problem: Revenue You've Recognized But Haven't Collected

The inverse problem is accounts receivable. You recognize revenue when you invoice, or when you hit a contract milestone, but the customer pays later. Your P&L shows the revenue now. Your cash flow statement shows the cash later, maybe 30 days later, maybe 60, maybe 90 if the customer is slow or disputes the invoice.

The gap here is just as real, but it's harder to see because it doesn't involve a liability account on the balance sheet that you can watch grow. It shows up as an asset, receivables, which sounds like a good thing until you realize an asset you can't spend is not useful for paying your suppliers this week.

Here's the relationship:

If receivables increased by ₦5 million this quarter, that's ₦5 million of revenue on your P&L that you have not yet collected in cash. Your revenue might be ₦20 million, but your cash from that revenue is ₦15 million, and the ₦5 million difference is sitting in a line item on your balance sheet, waiting for your customer to pay.

This becomes dangerous when revenue is growing, because receivables grow with it. If your average collection period is 60 days, and your monthly revenue grows from ₦10 million to ₦15 million, your receivables balance grows from ₦20 million (two months of the old revenue rate) to ₦30 million (two months of the new rate). That's ₦10 million in additional working capital you need to fund, just to support the same 60-day collection period at a higher revenue level.

The business is growing. The P&L is growing. The cash requirement is growing faster, and if you're not tracking the receivables balance as closely as you track revenue, you won't see it until you're short.

The Edge Case: Milestone Revenue and the Delivery Gap

The third structure is less common but more dangerous when it shows up: milestone-based revenue recognition. This is standard in project-based businesses, construction, large software implementations, consulting engagements with defined deliverables.

The accounting rule is that you recognize revenue as you complete the work, even if the contract specifies payment only on final delivery. If you're halfway through a ₦50 million project, and you can demonstrate that half the work is complete, you recognize ₦25 million in revenue. But if the contract says you get paid ₦50 million on delivery, your cash is zero until you finish.

The formula here is:

And the cash formula is:

These two numbers can be wildly different, and the P&L only shows you the first one.

I've seen this break a business. A consulting firm closed a ₦60 million engagement, structured as a single payment on delivery after six months of work. They recognized ₦10 million in revenue each month as the work progressed. The P&L looked healthy. The cash account drained every month, because they were paying their team and their overhead in real time, while the revenue they were recognizing was a promise of future cash, not cash they could spend today.

By month five, they were ₦8 million short of payroll, with one month of work left and no credit facility to bridge the gap. The client paid on time in month six. The firm survived. But it was closer than it should have been, and the warning sign was there the whole time, in the gap between revenue recognized and cash collected.

How to Read This Correctly

The fix is not to stop using accrual accounting. The fix is to read the P&L alongside the cash flow statement and the balance sheet, every month, not just at year-end.

Three numbers to track:

Operating cash flow: This is revenue adjusted for timing. It's the actual cash your operations generated this period, after accounting for changes in receivables, payables, and deferred revenue. If this number is consistently lower than your net income, you have a timing problem.

Days sales outstanding (DSO): This tells you how long it takes, on average, to collect revenue after you recognize it.

If DSO is increasing, your collection period is lengthening, which means your working capital requirement is growing even if your revenue is flat.

Deferred revenue balance: If this is growing, you're collecting cash faster than you're recognizing revenue, which is good for cash flow but means your P&L is understating the cash you have available. If it's shrinking, you're recognizing revenue faster than you're collecting new cash, which is fine if you're profitable on a cash basis, but dangerous if you're not.

The founder I mentioned at the start didn't have a revenue problem. He had a timing problem. His revenue was real, his contracts were solid, his customers were paying. But the structure of those contracts meant the cash came in unevenly, and the P&L smoothed it out in a way that made the business look healthier than the cash position supported.

We rebuilt his monthly cash forecast, not from the P&L, but from the actual payment terms in his contracts. Deferred revenue got tracked as a separate line. Receivables got aged and reviewed every week, not every quarter. Operating cash flow became the number he watched, not net income.

The business didn't change. The way he read the business changed. That was enough.

Why This Matters Now

This is not an edge case. Most businesses that grow quickly hit this gap, because growth increases the working capital requirement faster than it increases cash, and the P&L does not show you that relationship unless you read it structurally.

The businesses that survive growth are the ones that see this early, before the cash runs out, and adjust either the pricing structure, the payment terms, or the burn rate to match the actual cash timing, not the revenue timing.

Next week, Part 3: the expense that isn't really an expense, and how depreciation hides the real cost of running the business.

If you're reading your P&L and the cash position doesn't match the story the revenue line is telling you, this is the gap worth reviewing. A diagnostic call takes thirty minutes: [calendly.com/muhammed-adediran/30min](https://calendly.com/muhammed-adediran/30min).