One way to potentially increase the attractiveness and value of a business to a potential buyer or investor is to create a business model that requires prepayment of the cost of goods and services sold. This means the company receives money for a service or product that has yet to be provided or delivered to the customer.

For example, a company sells registration for an event, collecting payment before the event costs are paid. It then uses the cash collected to pay speakers, venue, and advertising expenses that must be paid before the event. Another example is a computer manufacturer, where the company requires payment before the computer is built; this enables the manufacturer to pay for the parts and labor, thereby saving inventory and carrying costs.

There are several examples of major tech companies using the unearned revenue account. For example, companies use subscription models to sell annual access to services such as Quickbooks, Amazon Prime, Canva, and Dropbox. These companies collect payments in advance and deliver the service later.

Receiving money before a service is fulfilled can be beneficial. The early receipt of cash flow can be used for any number of activities, such as paying interest on debt or purchasing more inventory.

It’s important to note that prepayment received is classified as unearned revenue in your financial statements. Unearned revenue is also known as deferred revenue and advance payments. It can be considered a prepayment for goods or services that a company is expected to supply to the customer later. It’s a debt owed to the customer that must be paid back to the customer if the service or product is not delivered within a year.

This prepayment is recorded as a liability equal to the revenue received until the good or service is delivered. The liability is noted under current liabilities. Because it is a current liability, it reduces working capital, the difference between a company’s current assets and liabilities recorded on its balance sheet.

The power of cost of goods optimization is something to consider when improving business operations and thinking ahead to your eventual exit.