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Dictionary
Debitoor's accounting dictionary
Cash on delivery (COD)

Cash on delivery (COD) - What is cash on delivery?

Cash on delivery is a payment term that indicates that payment for the order is collected when the products are delivered to the customer

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The ‘cash on delivery’ payment term is usually discussed and agreed upon before finalisation of the sale. When COD is the agreed upon payment terms, this means that the payment is collected at delivery, instead of before the products are shipped.

It is important to clarify that the payment must still be gathered before the handover of the products, preventing delivery in the case that payment is not provided.

Cash in COD

The use of cash in this context refers to the broader use of the term. To be more specific, ‘cash’ includes a variety of payment types including paper bills and coins, credit or debit card, cheque, or even electronic payment.

However, the payment type accepted for COD is generally specified by the seller, meaning that the buyer must be prepared to provide the full payment when the goods are delivered.

Why businesses offer COD

Online payment options and fast bank transfers might cause a business to question whether it makes sense to offer the option for cash on delivery to customers. There can be some situations in which COD can help a business’ cash flow:

  • New businesses can benefit from offering COD if they are still becoming established. This helps to show reliability to the customer, ensuring that their order will be fulfilled and only requesting payment at that time.
  • A customer base without credit cards or sufficient funds in a bank account. In other words, if a customer has cash but not the possibility to pay online, this option means they can still complete a sale. It can also be useful for customers who might be mistrustful of online payments, for example.

Sometimes, a customer will request COD for different reasons. Pensioners, those working from home, generally people who know that they will be available to receive a package and make payment at a certain place and time.

Another reason a customer might request COD is that it is arguably a more discreet method of completing a transaction, if they choose to pay with paper money this would not leave a record on their credit card or on their bank statement.

Pros and cons of COD

Depending on the business, COD might be a useful type of payment terms to offer. If you’re just getting your business off the ground, it there are certainly some perks on the business side to offering COD. However, there can also be negatives to COD.

The upsides of offering cash on delivery payment

The primary benefit to a business when it comes to COD, is that the payment period is typically shorter than with an invoice supplying bank details for a transfer, for example. Because the payment must be collected when the goods are delivered, this method can be useful for customers who have failed to pay or regularly have late payments.

Cash on delivery provides better assurance that the business will receive payment for the products and that means a more reliable cash flow which in turn makes it easier to budget.

The downsides of accepting cash on delivery

While there seem to be a number of positives of offering COD as a payment option, there are also some downsides. The main one is the higher risk of delivery refusal. Basically, because the customer does not pay for the goods in advance, they can decide to reject the delivery and not provide payment.

There is no clear commitment on the customer’s part to accept the delivery and make the payment, even if they have placed the order. This can lead to complications with the sale and returned items.

Cash on delivery and invoicing

It might seem like cash on delivery means skipping some parts of the sales process, however, this is not the case. Businesses should still issue invoices when an order has been placed, as part of a legal transaction but also to ensure thorough record-keeping.

An invoice can be created that specifies the payment terms ‘Cash on delivery’, giving the customer ample time to gather the necessary funds and make time to be present for the delivery.

In online invoicing software like Debitoor, this option can be included in the ‘Terms’ section of the invoice, or even in the ‘Notes’ section, making it clear to the customer when the payment is required.