Cash on Delivery, or COD, is a payment method in which goods are paid for when they are received by the buyer. Unlike with prepayment, the buyer is not liable to pay unless the goods have been deemed “received” or “delivered.” COD is typically riskier for the seller as they are required to take up a majority of the burden if they use this method. The concept of COD can also be implemented differently in various business accounting practices.
For most things that we buy in person, we pay once we receive the product or good. For instance, say you wanted to go to a 7-Eleven for some ice cream. You wouldn’t call up the 7-Eleven ahead of time, order the goods, and then rock up to the store an hour later to pick up your preordered ice cream. You would enter the 7-Eleven, select the ice cream you want from the freezer, and head to the counter to pay for it, where the cashier would ring you up.
Since you are paying for the ice cream after you select it and the cashier scans it, you are paying cash on delivery. This is a simple example of a complex concept that affects everything from shipping logistics to business accounting methods.
What is cash on delivery?
Cash on delivery, also known as collect on delivery or cash on demand, is defined as a transaction in which the buyer pays the seller once they have received the goods. Traditionally, it’s used to describe a cash payment that corresponds to receiving goods. If you’ve ever ordered a pizza and paid the delivery person after receiving it, then you have paid COD.
The term “cash on delivery” doesn’t just refer to cash payment of goods like pizza and ice cream. COD is also a significant concept in supply chain logistics and accounting. On its most fundamental level, COD is considered to be a risker option for the seller. This runs in stark contrast to prepaying, in which the buyer pays for the goods before they are received. However, COD can also be beneficial to the seller because they are sometimes able to receive their funds more quickly than with other types of payment.
Cash on delivery in accounting
When businesses calculate their cash-flow projections, they will use two different accounting methods to incorporate COD. Here are some examples of how COD applies to accounting:
COD in accrual accounting
Accrual accounting is not only a trusted accounting methodology but is actually required for public companies. Under the accrual accounting method, once an order has been transacted, it is considered “accounts receivable,” even if the product has not been delivered nor has any money arrived in the seller’s bank account. The benefit here is that the seller can focus on increasing sales and accounts receivable without having to actually receive the money in their bank account.
COD in cash accounting
Cash accounting is primarily used by private businesses. If you are ordering a pizza from a small local pizza place, for example, that business will probably use cash accounting to calculate the COD. Under the cash accounting method, a transaction doesn’t count as revenue until money for the product or good is actually received.
Cash on delivery in shipping and logistics
Cash on delivery is also often used when calculating the capital and payment structure of trade and logistics deals. If a factory is producing goods, then ideally, they want to find an end buyer as soon as possible. This end buyer can order a shipment of goods from the seller, but the terms of the deal will depend on the strength of the buyer and the seller.
If the factory is new and the buyer has a solid track record, the seller may allow the buyer to pay cash on delivery. The seller’s weaker track record means the buyer is taking a substantially greater risk on the transaction; paying for the goods only after they’re delivered helps to mitigate that risk. On the flip side, if the buyer is new while the factory has a solid track record, the seller will almost always require the buyer to pay for the goods before delivery.
FOB vs. COD
Another term commonly used in shipping is freight on board, or FOB. With a FOB payment, the client pays when the freight reaches the transport ship for embarkation. For instance, say you were buying 100,000 geological measurement instruments from Shenzhen, China. If you organized a FOB payment with the factory, then you would pay the seller once the instruments have been embarked on the ship.
On the other hand, if you were lucky enough to get a cash-on-delivery deal (which is rare), then you would not have to pay when the freight is on the ship. Instead, you would pay for the goods only after they’ve been delivered to your warehouse. Once the delivery has been confirmed, you can then release the payment to the seller.
The risks of cash on delivery to suppliers
Most suppliers prefer not to offer COD as a payment method because it comes with more risks than other payment options, such as FOB or prepayment. Here are some of the most common risks associated with cash on delivery:
Refusal of delivery
With FOB or prepayment, the goods are paid for before they leave their port of origin. With a COD payment option, the buyer does not release payment until the shipment is delivered. This gives the buyer plenty of leeway to refuse delivery of the goods. The seller will have already paid for production, insurance, and logistics. Should the buyer refuse delivery — and thus payment — the seller will end up losing money on the transaction.
Supply chain knock-on effects
Whenever a product is shipped from a seller to a buyer, it has to pass through multiple points along the supply chain. A delay anywhere in that supply chain, such as a truck driver shortage, can have an adverse impact on the seller. If the buyer is using a COD payment method, then a delay in delivery equates to a delay in payment. And if the seller needs that cash to pay their suppliers and distributors, that delay can cause a knock-on effect of late payments throughout the entire supply chain.
A change in political trade winds
In recent history, we’ve seen how trade practices can be upended in an instant by tariffs. To give one example, consider the US-China trade war that began in 2018. In the midst of this economic conflict, a supplier shipping goods to another country bears the risk of having tariffs slapped on the transported goods before or during transit. Should these be imposed, the question then arises of who will bear the cost of those tariffs. If the buyer is using cash on delivery as their payment method, the goods have not yet been paid for, which means the burden of the tariffs shifts to the supplier.
Cash on delivery in online transactions
If you’ve had regular access to the internet over the past several years, you’ve probably ordered something online at least once. In most cases, you shop for products on online stores and pay for your purchases instantly via online payments. However, some online sellers offer cash on delivery as a payment method to give their customer base more options. Shopify and AliExpress are two popular online retail services that offer a COD payment option for online shopping, and depending on customer demand, COD transactions may become more prevalent in the future.
What is the limit for cash on delivery?
There is no limit for cash on delivery.
What does COD mean in delivery?
COD is short for “cash on delivery.” This is a payment option in which the buyer pays for a purchase only when the goods have been delivered.
Is cash on delivery possible?
While cash on delivery is not necessarily the most popular payment option among merchants, it is possible and even prevalent in some industries.
What is the difference between “pay on delivery” and “cash on delivery”?
Pay on delivery includes cash-on-delivery payments but also extends to other digital payment methods that are not physical cash.
- Cash on delivery, or COD, is a payment method that allows the buyer to pay for goods after they have been delivered.
- COD is used to calculate cash flow in the two main business accounting methods: accrual accounting and cash accounting.
- Cash on delivery is also used in shipping and logistics, although it is not as common as prepayment or freight on board (FOB).
- COD can pose a risk to suppliers for various reasons: a delivery may be refused, delays may occur along the supply chain, and goods can be subject to tariffs as a result of global trade war policies.
- Cash on delivery is also offered as a payment option by some online shopping services, although it has yet to become a widespread online payment method in the United States.