# Customer-funded growth *Growth on your customers' cash* --- Two 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. --- A customer signs with Company A on 1 January and pays £10,000 that day. Delivering the service costs roughly £7,000, spread over twelve months. So on signing day the full year's revenue is in the bank, and what accounting calls "deferred revenue" (cash the company holds but hasn't yet earned) sits there while the costs dribble out. In practice it's an interest-free loan from each customer. By year three, with 271 active customers, Company A collects £2.71m on signing and renewal dates. If customers are spread across the year, the average one is always halfway through their contract, so roughly half the annual revenue across the base sits as unearned cash at any moment. That's about £1.35m of float, continuously replenished as customers renew. The pool builds as the cohorts stack up; a base still in its first year or two holds much less. | 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 signs the same customer on the same day. Delivery starts immediately, and so do the costs. The first invoice goes out on 1 February and the money arrives around 1 March. For two months the company is spending on a customer it has collected nothing from. By year three, with the same 271 customers, the position is reversed: instead of holding £1.35m of customer cash, Company B is owed about £226k it has 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 two businesses earn the same profit, and even the cash banked by year three differs by only £250k. The position is what differs: A sits on £1.35m of float, B is owed £226k, and the £1.58m between them comes entirely from when the invoices go out. --- All of this rests on one condition: the cost of delivery has to go out slower than the cash comes in. Company A's £7,000 dribbles out over twelve months, so the £10,000 collected on day one is usable in the meantime. A business that spends the money at the start - a bespoke project buying materials on day one, anyone paying commission at signing - consumes the prepayment as fast as it arrives, and there is no float. And the float is borrowed money. It holds while the base is growing or steady. Let renewals stop replacing what delivery consumes and the pool drains, so the business that has already spent its customers' cash on growth is the one a downturn squeezes first. --- Now suppose each new customer costs £5k to acquire. Company A funds next year's campaign from the float on its existing base, because new prepayments continuously replace what delivery consumes. Company B needs £500k of external working capital for the same campaign, because the cash from a new customer trickles back over months rather than arriving on day one ([[Paying for growth]] walks that arithmetic). The same growth plan deepens A's cash reserves and widens B's funding gap. --- Sometimes outside capital is still the better choice. In a market racing to a single winner, a rival with deep pockets can take the ground before a self-funded business gets there, though those markets are rarer than they look. And prepayment takes a track record. A new or unproven business may find monthly terms are the only ones customers will accept, and the gap has to be funded from somewhere. --- You have more control over billing terms than you probably exercise. An annual option with a meaningful discount (two months free, say) can shift a good share of a monthly base to upfront payment within a year. The 17% haircut looks painful until you weigh it against the cash it frees: each converted customer pays close to a year's cash roughly ten months earlier. For a business that would otherwise be borrowing to grow, that trade usually works. Shorter payment terms, deposits before project work begins, prepaid usage - they all move the same lever. So do minimum commitments that start at signature: I've watched a deal priced on hundreds of sites shrink to a fraction of its volume, because nothing in the terms made the customer hurry to roll them out. Nobody voiced the shortfall loudly, either; it got caught at the tail end of monthly reviews. Revisiting your billing defaults at renewal is one of the highest-return changes you can make. ---