Last week, I asked a question that should come before setting any growth target:

What are you actually trying to grow?

• Revenue
• Contribution
• Recurring income
• Capability
• Long-term business value
• Founder independence

Once the objective is clear, the next question usually becomes: “How much could this growth generate?”

However, there is another question that needs to come first:

What must the business spend before any of that money reaches the bank?

An Apparently Attractive Opportunity

Imagine an agency wins a new contract worth £240,000 a year.

The contract will generate £20,000 of monthly revenue.

Two new employees are required to deliver the work. Their combined salaries and employer costs will cost the business approximately £12,000 each month.

On the annual forecast, the opportunity looks attractive:

• £240,000 of additional revenue
• Approximately £144,000 of direct employment costs
• Potential gross contribution approaching £100,000

The customer has signed.

The revenue is secured.

The numbers appear to work.

So the agency begins recruiting.

However, the two employees need to start in September so they can be onboarded and prepared before delivery begins in October.

Recruitment fees, equipment and software require an initial investment of approximately £15,000.

The first month’s work is completed in October.

The first invoice is then raised at the end of that month.

The customer has agreed 60-day payment terms, meaning the first £20,000 payment is not expected until the end of December.

By the time that first customer payment arrives, the agency may already have paid:

• £15,000 in recruitment and setup costs
• Four months of employment costs totalling approximately £48,000

The contract may generate a healthy contribution across its first year.

However, the business has had to find more than £60,000 before receiving the first £20,000 from the customer.

So who is paying for the growth before the customer does?

Growth Starts Costing Before It Starts Paying

Most growth plans follow a similar sequence.

1. The opportunity appears
2. The business makes a commitment
3. Recruitment or investment begins
4. Costs start
5. Delivery begins
6. The customer is invoiced
7. The customer pays
8. The investment begins to repay itself

The growth decision starts affecting the bank long before it starts improving the bank.

That period creates what I call the Growth Funding Gap.

The Growth Funding Gap is the maximum amount of cash the business must commit before the resulting customer cash begins to fund the investment.

It can be created by:

• Recruitment costs
• Salaries before productive delivery
• Employee onboarding
• Equipment and technology
• Marketing expenditure
• Product or service development
• Delivery completed before invoicing
• Customer payment terms
• VAT and other tax timing
• Lower productivity during the initial ramp-up period

None of those costs necessarily make the growth decision wrong, but they do need to be funded.

Profit Is Not the Same as Funding

A profit forecast asks: Will this decision eventually generate sustained profit?

A cash forecast asks: When will the money leave and when will it return?

A funding assessment asks: Can the business comfortably carry the difference between those dates?

Those are three different questions.

The annual forecast may tell you that the destination is worthwhile.

It does not automatically prove that the business can afford the journey.

Someone Is Always Funding the Gap

Every Growth Funding Gap has a funder, even when nobody has consciously decided who that funder will be.

It might be funded by:

• Existing cash reserves
• Profits generated by current customers
• The founder
• A bank or other lender
• An investor
• Supplier credit
• The new customer through deposits or advance billing

Each creates a different form of exposure.

If existing cash reserves fund the gap, the new opportunity may reduce the financial security of the current business.

If existing customers fund it, the cash generated by established and profitable work is being reinvested in an opportunity that has not yet delivered a return.

If the founder funds it, a business growth decision has created additional personal exposure.

If a lender funds it, the business is accepting interest, repayment commitments and potentially additional security requirements.

If the customer funds it through a deposit, mobilisation fee or advance billing, the financial exposure may be considerably lower.

None of those choices is automatically right or wrong.

The important point is that the choice should be deliberate.

If nobody decides who should fund the growth, the existing cash in the business is most likely to become the answer by default.

Four Dates and One Number

Before approving a significant growth investment, identify four dates.

1. The commitment date

When does the business become financially committed?

This may be when an employment contract is signed, a lease is agreed, software is purchased or a supplier is appointed.

It is not necessarily the date the cash leaves.

It is the point at which changing direction becomes more difficult or expensive.

2. The first cash-out date

When will money begin leaving the business?

Some costs may be immediate. Others may be delayed by several weeks or months, or even after the growth starts generating revenue.

3. The first realistic cash-in date

When will the resulting customer cash actually be collected?

Not when the customer is expected to agree.

Not when the work begins.

Not even when the invoice is raised.

When is the money realistically expected to arrive in the bank?

4. The payback date

When will the cash generated by the growth have fully recovered the original investment?

Receiving the first customer payment does not necessarily mean the funding gap has disappeared.

5. Cash Exposure

The fifth thing to calculate is the most important:

What is the maximum cash exposure between making the commitment and reaching payback?

That is the number the business must be capable of funding.

What If the Timing Moves?

Growth forecasts often assume:

• Recruitment happens on time and on budget
• The customer starts when expected
• New employees become productive immediately
• Delivery proceeds without additional cost
• Invoices are raised exactly when planned
• The customer pays on time
• Contribution reaches its target from the first month

Sometimes all of that happens.

Often, at least one assumption moves.

Return to the agency example above.

If the first customer payment arrives one month late, the business may have to fund another £12,000 of employment costs before receiving anything.

The Growth Funding Gap has now increased from approximately £63,000 to £75,000.

What happens if recruitment also costs more than anticipated?

Or the customer delays the start date?

Or the new employees require longer to reach full productivity?

A growth decision should not need every assumption to work perfectly for the business to remain financially comfortable.

The purpose of a downside forecast is not to predict disaster.

It is to test whether normal delays and variations turn an attractive opportunity into an uncomfortable cash exposure.

Can You Redesign the Gap?

The Growth Funding Gap is not always a fixed amount the business must simply accept.

Sometimes it can be reduced before it needs to be financed.

Could the customer:

• Pay a deposit?
• Fund a project initiation or mobilisation fee?
• Pay the first quarter or year in advance?
• Accept monthly billing in advance rather than in arrears?
• Agree shorter payment terms?
• Approve invoices against delivery milestones?

Could the business:

• Phase the recruitment?
• Use contractor capacity initially?
• Align employee start dates more closely with delivery?
• Delay non-essential technology or equipment costs?
• Make permanent commitments only when defined revenue has been secured?
• Arrange working-capital finance before it is urgently required?

Commercial terms are also funding terms.

The way a contract is priced, invoiced and collected determines how much of the growth the customer finances, and how much must be carried by the business.

The cheapest funding gap is often the one redesigned before it needs to be financed.

Seeing the Complete Growth Decision

The Growth Funding Gap is also a good example of where The Nuvem9 becomes useful.

Not as nine isolated numbers or another dashboard to review, but as a way of seeing the complete decision.

Secured revenue tells you how confident you can be that the work will happen.

Gross contribution tells you whether the return should be worthwhile.

Planned delivery shows when additional capacity will be required.

The cash forecast tells you whether the business can fund the timing difference.

No single metric can approve the growth decision on its own.

One measure may be green while another is amber or red.

That does not necessarily mean the business should reject the opportunity.

It means a decision is required.

Can the commercial terms be improved?

Can the commitment be phased?

Can the exposure be funded deliberately?

Can the business protect a minimum cash reserve while still proceeding?

Better visibility gives the founder time to answer those questions before the commitment becomes difficult to reverse.

Calculate the Gap Before You Commit

Think about one growth decision currently being considered inside your business.

It could be:

• A new employee
• A significant customer
• A new service
• A marketing investment
• Additional premises
• Expansion into a new market

Then identify:

1. What must the business commit?
2. When will the first cash leave?
3. When will customer cash realistically arrive?
4. What is the maximum cash exposure?
5. What minimum cash reserve must remain protected?
6. What happens if the return arrives one month later than planned?

A growth plan can be profitable on paper and still be unaffordable in practice.

The question is not only whether the investment will repay the business eventually.

It is whether the business can comfortably reach the point at which it does.

Before approving the investment, calculate the lowest point in the bank, not just the highest point in the profit forecast.

Next week, I will look at another way to control the exposure created by a growth decision.

Not by predicting the future perfectly.

By being more deliberate about the commitments made along the way.

Which creates the next question:

How much of your growth plan is reversible?