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What Is Cash on Delivery (COD)?
Cash on delivery (COD) is a financial transaction that enables recipients to pay for goods upon delivery, offering a practical alternative to credit-based transactions. This model of payment allows for varying terms and forms of payment, which are determined by the specific purchase agreement.
By understanding and utilizing COD, businesses can manage cash flow more effectively while offering customers a flexible payment option.
Key Takeaways
- Cash on delivery (COD) is a payment method where customers pay for goods upon receiving them, often with cash or card, allowing consumers without credit access to shop.
- COD offers quicker cash flow to sellers and reduces their exposure to credit risk, but it also carries the risk of goods refusal at the time of delivery.
- While beneficial for buyers without credit, COD can be disadvantageous for sellers due to the possibility of increased return costs and managing refusals.
- In COD transactions, goods are shipped before payment, contrasting with cash in advance where payment is made before shipment, protecting the seller from nonpayment risks.
- This payment option has gained popularity in regions with limited credit access and has helped bolster e-commerce growth, such as in countries like India.
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Eliana Rodgers / Investopedia
How Cash on Delivery (COD) Affects Business Operations
A cash-on-delivery transaction can take different forms and may affect a company’s accounting differently. Public companies are required to use the accrual accounting method under generally accepted accounting principles (GAAP).
With accrual accounting, a company recognizes revenue at the time of the transaction and records the payment in accounts receivable if the payment is deferred. Private companies can use either accrual or cash accounting. In cash accounting, the company must wait to record the transaction as revenue until payment is received.
If a customer is dealing with a merchant in person and the customer makes a purchase from readily available inventory, payment is collected at the time of sale as a form of cash on delivery. Under the accrual accounting method, this leads to a shorter accounts receivable period and higher efficiency.
Important
If a company allows for COD shipping, it is willingly giving the customer more time to make a payment with somewhat less risk than a credit purchase.
For longer-term accounts receivable agreements, companies can set up COD shipping that allows the customer to defer payment until the time of delivery. On certain mail order platforms, such as eBay, COD can be used to help minimize the risk of fraud between buyers and sellers. Overall, COD does not require payment from a purchaser until they have received their purchase.
Pros and Cons of Cash on Delivery for Buyers and Sellers
Advantages
For many businesses, in-person COD facilitates the immediate payment of goods and services. This is a significant accounting advantage because it can greatly shorten the days receivable for a business.
COD usually results in faster delivery times than standard invoicing. It benefits sellers because customers must pay upon delivery, giving buyers time to gather funds.
However, COD shipping increases the risk that a customer will not plan appropriately for payment and the purchase will have to be returned. Returned purchases do not contribute to revenues and even less to profit and do entail lost shipping costs, both of which are disadvantageous to the merchant and the customer experience.
Offering COD can boost consumer confidence in new companies lacking established brand recognition. Established companies generally avoid COD risks, preferring credit payment plans with interest and late fees.
However, in some cases, COD has an advantage over credit since the seller receives the full payment at delivery. COD can also help merchants avoid some risks of buyer identity fraud, stopped payments, or electronic card disputes. In some countries, such as India, cash-on-delivery transactions are boosting internet commerce. COD transactions appeal to consumers without established credit or alternative means for paying for goods.
Disadvantages
COD poses a higher risk of delivery refusal and incurs return costs for businesses. Buyers may struggle to return items purchased via COD, as sellers may not accept returns even if customers are dissatisfied.
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COD requires quicker payment compared to other methods.
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The method provides some protection from customers who might fail to pay or pay late.
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COD can enhance cash flow and budgeting for businesses.
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Consumers who do not have credit can buy products.
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Risk of delivery refusal is greater.
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Returning items can be costly for sellers who lack return infrastructure and support.
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Buyers may find it difficult to return items that do not meet expectations.
Comparing Cash on Delivery and Cash in Advance Payment Methods
With cash in advance, the buyer pays before the product or service is delivered, unlike COD. Cash-in-advance payment methods, such as credit, are used to eliminate the seller’s credit risk, or the risk of nonpayment. The seller benefits from cash in advance, and the buyer risks receiving delayed or damaged goods or goods that are not as expected. Conversely, COD offers advantages for both buyers and sellers.
For cash-on-delivery terms, goods are shipped before payment is made. For cash-in-advance terms, the seller requires the buyer to make the entire payment upfront in order to initiate the shipping process. This protects the seller from lost money for goods shipped without payment.
Cash in advance is the most common form of payment for online marketplaces, ecommerce, and international business trade. Whether a business chooses to use cash on delivery or cash in advance depends on its ability to assume risk. Larger businesses may offer cash in advance for buyers because their accounts receivable and collections processes are more advanced.
What Is the Meaning of Cash on Delivery?
Cash on delivery is when a buyer pays for goods or services once they are received. Cash in advance, on the other hand, is when payment is made before the goods or services are shipped—for example, an ecommerce credit transaction.
How Does Cash on Delivery Work?
Buyers place an order, for example, on a website and request delivery. The customer does not make payment while ordering the item and chooses cash on delivery as a payment method. Once the order is placed, an invoice is prepared by the seller, which is attached to the parcel.
The parcel is shipped from the seller to the address provided by the customer. The customer pays the deliverer or shipper using cash or card. The COD amount is then deposited into the account of the logistics partner or shipper. The logistics company remits the amount to the seller’s account after deducting the handling charges.
What Are Examples of Cash on Delivery?
Examples of cash on delivery are when customers pay for a pizza that is delivered to their home, when a courier delivers something that a customer has agreed to pay for when it is delivered, or when a customer picks up clothing from the dry cleaning store. Some online stores will allow cash on delivery.
The Bottom Line
Cash on delivery is a payment option that has benefits for both buyers and sellers. For buyers without credit, COD is a convenient way to buy the things that they need. For sellers, as long as the goods are accepted on delivery, payment is quicker. Ultimately, the payment options that a seller provides depend on how much risk the seller is willing to assume and their capacity to handle complications such as returns and late payments.
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