# Customer-funded growth _When cash arrives matters as much as how much arrives._ --- Two software businesses, identical except for billing terms. Same product, same customers, same cost structure. Each adds 100 customers a year at £10k annual contract value, retains 90%, and spends roughly 70% of each contract on delivery. Company A bills annually, upfront. Company B bills monthly, thirty days in arrears. --- **Company A's cash.** A customer signs on 1 January and pays £10,000 that day. Service delivery costs roughly £7,000 spread over twelve months. On signing day the full year's revenue is in the bank. What accounting calls [[Cash and profit|deferred revenue]] is cash the company holds but hasn't yet earned by delivering service. In practice it's an interest-free loan from each customer. By year three, with 271 active customers, Company A collects £2.71m on renewal and signing dates. The example assumes all customers sign on 1 January for simplicity, but the float calculation holds regardless of timing: if customers are evenly distributed across the year, the average customer is always halfway through their contract, so roughly half the annual revenue across the base sits as unearned cash at any point. That's about £1.35m of customer float, continuously replenished as customers renew. | Year | Active customers | Cash collected | Cost to serve | Surplus | Cumulative | |------|-----------------|----------------|---------------|---------|------------| | 1 | 100 | £1,000k | £700k | £300k | £300k | | 2 | 190 | £1,900k | £1,330k | £570k | £870k | | 3 | 271 | £2,710k | £1,897k | £813k | £1,683k | **Company B's cash.** Same customer, same signing date. Service delivery begins immediately, incurring costs from day one. First invoice goes out on 1 February. Payment arrives around 1 March. For two months the company is spending money on a customer it has collected nothing from. By year three, same 271 customers, opposite balance sheet. Instead of holding £1.35m of customer cash, Company B is owed about £226k in receivables, revenue earned but not yet collected. | Year | Active customers | Cash collected | Cost to serve | Surplus | Cumulative | |------|-----------------|----------------|---------------|---------|------------| | 1 | 100 | £917k | £700k | £217k | £217k | | 2 | 190 | £1,817k | £1,330k | £487k | £704k | | 3 | 271 | £2,627k | £1,897k | £730k | £1,434k | The cumulative surplus gap is about £250k by year three, but it understates the real difference. Company A holds £1.35m of float at any point; Company B carries £226k of outstanding receivables. The £1.58m swing in available cash comes entirely from when invoices go out. --- **Where the gap compounds.** Suppose each new customer costs £5k to acquire. Company A can fund its next acquisition campaign from the float on its existing base, because new prepayments continuously replace the float consumed by service delivery, making it effectively permanent working capital. Company B needs £500k of external working capital for the same campaign, because revenue from new customers won't arrive for months. Growth widens B's funding gap and deepens A's cash reserves simultaneously. Payback sharpens the point. Twelve-month payback on annual upfront billing means the first payment recovers acquisition cost in full. Twelve-month payback on monthly arrears means the company funds a full year of delivery while cash arrives in instalments. [[Paying for growth]] covers this in detail: identical LTV:CAC ratios produce opposite capital requirements depending entirely on when cash arrives. [[The churn ceiling|High retention]] amplifies the effect. Each retained customer generates another year of upfront float (Company A) or another year of receivables lag (Company B). At 95% retention the steady-state customer base nearly doubles compared to 85%, and the float pool doubles with it. --- **When external capital is the better choice.** In winner-take-all markets where network effects determine the outcome, speed matters more than capital efficiency. A competitor deploying £50m of venture capital can capture market share and establish [[Switching Costs|switching costs]] before a self-funded rival reaches scale. Two-sided marketplaces with strong tipping-point dynamics reward land-grab strategies that only external capital enables. Self-funding also requires customers willing to prepay, which requires product trust and brand credibility that early-stage companies haven't earned. Monthly contracts with short notice periods are often the only realistic option, and the cash dynamics require external capital until the product earns the right to shift billing terms. Most B2B [[Verticals|vertical software]] markets have room for multiple players and reward depth of product over speed of capture. These are markets where self-funding works. Consumer marketplaces with network-effect tipping points are markets where it often doesn't. Market structure determines the answer, not company preference. --- **Shifting billing terms.** Operators have more control here than they typically exercise. An annual billing option with a meaningful discount (two months free, for instance) can shift a substantial share of a monthly base to upfront payments within a year. The 17% revenue haircut looks painful until you calculate the float it generates: each converted customer creates ten months of usable cash that wasn't there before, often worth more than the discount. Reducing payment terms from net-60 to net-30 on enterprise contracts, requiring implementation deposits before project work begins, and moving to prepaid credit models where customers buy usage in advance all accelerate cash collection relative to delivery cost and widen the float. Competitive dynamics set the limit, because if every competitor bills monthly, demanding annual upfront may lose deals. But most customers will prepay if the discount is structured sensibly, and revisiting billing defaults on renewal is one of the highest-return changes an operator can make. ---