Originally, cash on delivery (COD) exclusively referred to mail-order purchases that required physical currency to be turned over to the courier or postal worker upon delivery. However, in the years since, the definition has expanded and evolved to cover any simultaneous exchange both for shipped orders and in-person purchases.
You likely engage in cash on delivery transactions daily, depending on how frequently you spend money in your personal life. Every time you go to the grocery store, pick up your dry cleaning, or hit the taco truck on the corner. Any time you pay for a good or service when it is provided or delivered, you make a COD payment.
But when it comes to COD in the B2B world, there are a few extra considerations to remember. Here’s what you need to know.
How does cash on delivery work?
Cash on delivery starkly contrasts acquisitions where the store, business, or service provider offers credit terms for a transaction, requiring the buyer to render payment typically within the next 30 days. Instead, with COD, the buyer must provide the seller with instant payment — give or take a few seconds — once goods are delivered.
Do you need cash for cash on delivery?
No, not anymore. Let’s unpack that. The “on delivery” part has become more important than the “cash” part; what matters most is whether or not the seller received their payment at the point of delivery. For example, when you hand over a credit card at the end of a meal, the restaurant will run the card and receive a credit from the card provider within seconds.
And while final payment authorization may take a day or so, the restaurant has already completed the transaction and added those funds to its revenue records.
Immediacy identifies a COD payment, and these transactions can take the form of:
- Credit/Debit cards
- Mobile (e.g., payment via SMS)
- Payment platforms (e.g., Square, Venmo)
Cash on delivery vs. cash in advance
While fairly similar to COD, cash in advance moves the actual payment to earlier in the process — the time of order. Many online retailers and marketplaces rely on this model, requiring consumers to provide credit card or banking information as they check out. So the payment is processed before the warehouse is even directed to pull and ship your order.
This payment strategy shifts most of the transactional risk to the buyer. The seller is assured payment, while the buyer might encounter damaged goods, delivery failures, or incorrect orders. In contrast, with cash on delivery, the seller assumes a larger portion of risk — particularly if the buyer changes their mind, cancels the order, or returns it without payment.
Does cash on delivery still exist?
Even under its original mail-order definition, cash on delivery still occurs, albeit in a limited capacity. Meanwhile, the more modern definition covers most in-person retail or business-to-consumer purchases for the average shopper.
In the realm of business-to-business (B2B) transactions, however, COD is far less common than alternative, credit-based purchase options. But it still is prevalent in certain situations.
Some examples of cash on delivery in B2B
A business called It’s a Gamble, Inc. is one of the world’s largest manufacturers of slot machines. Its products can be found almost anywhere — among some of the finest casinos in Monte Carlo, on cruise ships traveling the Mediterranean, and even in the average gas station in Las Vegas.
Given the volatile nature of the gambling industry and some of its customers’ inconsistency, It’s a Gamble, Inc. opted for a multi-pronged payment strategy. For its larger customers in good standing, the business offers generous credit terms and packaging invoices that request payment in the next 45 days among its shipments. But for smaller, unestablished, or financially-struggling customers, It’s a Gamble, Inc. uses COD. These businesses are required to render immediate payment by credit card to the delivery driver before the first slot machine rolls out of the back of the truck.
An online business called Voulez-vous du Beurre? is an online business that specializes in custom, highly-detailed sculptures made of butter — admittedly, a niche market. And while the company initially relied on cash in advance — requiring payment when an order was placed via its online portal — with such a fragile, temperature-controlled product being shipped across the country, melted or damaged sculptures were being delivered with alarming frequency.
Besides reworking its entire delivery model, Voulez-vous also shifted to a COD payment model to help protect its reputation. The business now waits for the bespoke sculpture to be delivered — and inspected by the customer — before requiring prompt payment to their shipping partners.
What is the advantage of cash on delivery?
COD might be the right call for you, depending on the nature of your business and industry. Regarding accounts receivable (A/R), it can dramatically accelerate your payment cycle compared to credit-based options. And due to the immediate payment, your cash position will also improve — which can be particularly helpful in managing your cash flow and A/R during an economic downturn. Further, you can get these advantages all while avoiding the accrual of bad debts on the revenue side of your balance sheet caused by late or missing payments.
Conversely, when your business is the buyer, paying COD lets you avoid the risk of non-delivery that a cash in advance model will contain. At the same time, your accounts payable (A/P) processes will also be truncated, skipping much of the busy work to primarily focus on order verifications at the point of delivery. And since you don’t pay until you have the goods in hand, you’ll be much better protected against scammers and their shenanigans.
To explore these advantages — and corresponding disadvantages — in more detail, check out our blog: The Pros and Cons of Cash on Delivery
No matter your payment strategy, automated accounting software can help
While a COD strategy will make some of your A/R and A/P processes shorter, there are still tasks that you’ll need to perform. And typically, you’ll need to complete these accounting actions much more quickly than for comparable payment strategies.
For example, when making a COD purchase, you’ll likely want to verify the shipment before handing over your check or credit card. But manually pulling up the original order slip and any required payment operations can prove time-consuming. With B2B payment automation, however, you can perform a near-instant 3-way matching check to verify that all is as it should be without inconveniencing the delivery driver.
At the same time, if your business is expecting a COD payment, you’ll also want to make that process as simple as possible for your customers. One method is to employ an automation solution that includes e-invoicing capabilities—allowing you to export your payment expectations directly to your customers’ purchasing system. Of course, employing multiple strategies might make more sense than exclusively using COD.
Automated A/R and A/P at Invoiced
At Invoiced, our automation platforms are highly flexible and can be adjusted to fit the unique financial needs of your business. Want to learn more about Accounts Receivable Automation software or our Accounts Payable Automation software, or become part of our E-invoice Network?
Schedule a demo today to see just how simple collecting payments can be.