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Hot Stock Software Accounting
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In general, software companies have fairly clean financial statements with minimal debt and fairly simple capital structures. However, there is some jargon you should understand to help you dig into the industry, as well as some metrics that are more common to the software industry than to others.

License Revenue

License revenue is the best indication of current demand because it represents how much new software was sold during a given time. It's a very profitable source of revenue because software can be produced for almost nothing after it has been developed. Service revenue, which is the other major type of revenue that many software firms report, is less profitable because It's expensive to employ consultants to Install software. Keep an eye on trends: Increasing license revenue indicates healthy demand, whereas declining license revenue may indicate that growth is slowing because licenses drive future service revenue.

Deferred Revenue

Although it's recorded as a liability on the balance sheet, deferred revenue is a good liability to have—it represents cash the company has received before some services have been performed. It's common for software companies to get paid for consulting and maintenance work up front, so tracking deferred revenue can give you a good estimate of the potential trend in future revenues.

Days Sales Outstanding (DSO)

Days sales outstanding indicates the number of days that it takes a company to collect ks outstanding receivables. Refer to the balance sheet and income statement and calculate this formula: accounts receivable/(revenues/number of days in the reporting period). The absolute DSO number is less important than the trend in DSOs. Falling DSOs indicate a company is collecting its outstanding accounts faster than before, whereas rising DSOs may indicate that the company has extended easier credit terms to customers to close deals and boost revenues. However, this practice merely steals revenue from future periods and may lead to revenue shortfalls. In an industry where demand can change quickly, rising DSOs are often the first signal that a firm's products are no longer as hot as they once "were.

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