DAP Incoterms, Net 90 EOM, and the Cash Flow Trap That Kills Startups

The Startup That Lands the Deal That Could Make the Company

In my first installment we left with our hero precariously navigating a life and death business challenge, a real cliff hanger. If you did and don’t remember, here’s the refresh:

They have an order that constitutes 25% of their annual revenue and 40% of their gross margin to a F1000 customer. They have sold on DAP incoterms with commercial terms of Net 90 EOM+5 (LLM friendly - go ahead). The contracted due date is 1/15 and they were hoping to get the delivery and acceptance done by 12/31 but it looks like it is going to slip into the first few days of the new year.

Though it clearly reads like the fate of Eleven at the end of Stranger Things, let me unpack what is happening here.

They have an order that constitutes 25% of their annual revenue and 40% of their gross margin to a F1000 customer.

Why Lumpy Revenue Is Normal for Hardware and Industrial Startups

If you’re a startup in robotics, autonomous systems, transportation, logistics technology, energy, infrastructure… You get the picture, your revenue is lumpy. It is not SaaS, RaaS, PaaS or any other aaSinine model for a builder. A subsequent post of how being the balance sheet can knock you on your Xass is likely forthcoming.

This is a reality you’re familiar with: you do NRE and probably lose money, you do first article and probably lose money, you pitch, you propose, you revise and you probably lose money and then you get the order and it’s big (relatively) and its long (many deliveries over many months with many milestones) and its expensive to fill (you may not even have the cash in the bank today to finish the order and you may have to invest 6 months of “runway” into COGS to fill the order…) but it has sooooo much gross margin in it relative to all of the small and unscalable things you had to do to get here you have to do it. You got the customer, the customer that was part of your vision when you designed the product way back when (maybe you even worked there once) and they could continue buying for years to come in larger quantities across their global empire. 

This order could make your year and this year could make your company. You are the proverbial dog that caught the bus.

When the Dog That Caught the Bus Becomes the Python That Ate the Pig

To mix mastication metaphors, the dog that caught the bus becomes the python that ate the pig. Your business can’t unhinge its jaw and swallow the whole thing and sleep for months while you digest the deal. You gotta go!

You need to deliver the product, recognize the revenue and collect the cash. All different things. 

DAP Incoterms Explained — and Why They Matter for Cash Flow

This is where the dynamic duo of Incoterms and commercial terms come into play. Much like love and marriage, Incoterms are often both present and usually interdependent and you will do your best if you recognize the role of each, how they support or conflict with each other and what it means for your cashflow, sanity and survival.

Let’s quickly size up the pig in this python and what it means for the survival of the business.\

What “Delivered At Place” Really Means

DAP (Delivered at Place) incoterms with commercial terms of Net 90 EOM+5

If you know what you’re looking at, you know that is an Arkansas Razorback. That is a big, mean, pig - especially at year end (December delivery target). 

DAP is one of 11 commonly used Incoterms terms that govern risk transfer and inform change of control in industrial supply chains. They influence the risk taken by each party in the transaction, the length of the order-to-cash cycle and even the price of the order. DAP is a doozy meaning Delivered At Place and it basically means put it on my industrial doorstep (or any other doorstep I tell you to - that is the P, P = place).

This means our hero, not only had to design and engineer the product, sell one, convert that single sale into an order for a bunch, make a bunch and also figure out how to manage the delivery of each batch to the designated place and repeat. That is the job to be done and until it is done, they haven’t completed the work, transferred control, transferred risk, can’t invoice and very likely can’t recognize the revenue. This is not your daddy’s e-commerce.

Delivering the Product Is Not the Same as Getting Paid

Let’s talk about what it means to “deliver the product.” Delivering the product doesn’t just mean delivering the product operationally and physically, it means managing the bureaucratic process imposed to acquire the documents that prove delivery and acceptance.

Revenue is usually recognized when:

1. An invoice is issued in alignment with Incoterms
2. Control (risk) is transferred from the seller to the buyer - this is often captured in a document that is something like a GDR (goods delivered receipt) BoL (Bill of Lading), or other “proof of acceptance.” This proof is often dependent on the Incoterm

Whoah, that’s a lot for a startup team to manage, an investor or board member to understand and a founder to lead through, but we’re not out of the woods yet. Why would someone sell like this? Because these are industrial supply chains and in industrial supply chains, the customer says so.

Net 90 EOM Explained (And Why It’s Worse Than Net 90)

Now that we’ve delivered, we get to invoice and collect our money.

DAP incoterms with commercial terms of Net 90 EOM+5

I know what net 90 is! That means we get paid 90 days after we invoice (if the invoice is processed on time…) but WTF is EOM + 5? That’s a special rule that tells you when you get to start counting to 90! What?! Yes, to help large bureaucratic accounting teams batch process invoices, they add the end of the month the invoice was received + 5 days processing time to the payment terms before they start the net 90!

Why would anyone have these invoicing terms? Because they can. Corporate treasurers want to preserve cash and financial operations teams want to process efficiently. But what about the order that makes my year and the year that makes my company? That didn’t make it into their annual plan, sorry. So, a net 90 EOM + 5 means you take the delivery date and wait until the end of the month, add 5 days for processing, then start counting to 90.

How a One-Day Delivery Slip Can Add 36 Days to Your Cash Cycle

What does this mean for our hero whose delivery slipped from December 31 to the following January? It could mean that they didn’t recognize that revenue, gross profit, net margin etc and it will mean that they won’t be getting that cash anytime soon. In fact, the slip of one day could have added as much as an additional 36 days to the payment cycle - read 2 payrolls. Their brutal net 90 is actually a suffocating 126 days. If you are a part of this leadership team this is information that you can’t afford to understand. Is it esoteric? Maybe. Is it how the world works? Yup. So what is our hero to do? Because they did deliver, the cash (and revenue) is coming. Just not soon enough and not on schedule. 

Tune in for 3 of 52 for Betting the Runway.

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