How Does Cash on Delivery Work?
Also known as collect on delivery, the COD method eliminates the need for extending credit. With this payment model, customers settle their bills as soon as they receive the deliverables. While this sums up the general features, companies can choose several ways to implement it. Here are some factors to consider.
Private companies can use either this method or accrual counting. With the cash accounting method, bookkeepers record revenue when they receive it. This is the more straightforward form of documenting transactions and is most commonly used by small and medium-sized businesses.
Accrual Accounting Method
Public companies must use this accounting method for recording transactions. It compels companies to record revenue at the time the transaction occurs. When payments come in later, these companies use accounts receivables to record payments.
Collected at the Time of Sale
Collected on delivery implies that customers must have the goods on hand when paying, but this is only sometimes the case. Consider the example of a company that has a readily available inventory. A customer visits in person and places an order for delivery the following day. The company can accept payment upfront as a form of COD.
Sometimes, companies decide to split the risk with customers by collecting a cash on demand payment and the remaining balance at the delivery time. Similarly, businesses may choose to accept half at the delivery time and collect the remaining balance later. This approach might make sense for companies that extend credit to long standing customers but might want to exercise caution for high-risk customers.
How Does Cash on Deliver Compare To Cash in Advance?
There are several key differences between cash in advance and collect on delivery. With cash in advance, customers pay before receiving them. This can be an attractive payment method for businesses that want to minimize risk, eliminating wait time and the need to chase invoices. However, there may be a lower conversion rate with cash in advance because customers might want to avoid shouldering all the risk or giving up the option to delay payment.
On the other hand, collection on delivery allows businesses to receive revenue immediately. This reduces wait time and related costs, such as financing fees or bad debt write-offs. Still, this method can be riskier for businesses due to potential customer non-payment. It may also not be ideal for companies that require large sums of money upfront to cover costs, such as manufacturing or delivery charges.
Ultimately, the best payment model will depend on your business’s unique needs and goals. To determine whether COD is right for you, consider your customers’ preferences, risk tolerance, and your own budget and cash flow. With a well-thought-out strategy, you can successfully implement the right payment method and reap its many benefits.
What Are Some Best Practices for the Collect on Delivery Method?
Businesses can follow several best practices when implementing COD. Some key considerations include understanding your customers’ payment preferences and risk tolerance, clearly communicating the payment terms, regularly tracking and reconciling accounts receivables, and planning for potential delays or non-payments from customers.
Leverage Autopay Enrollment Tools
Many payment processing platforms offer autopay enrollment tools, which make it easy for customers to schedule automatic payments. These tools can help increase conversions and reduce non-payments by giving customers more control over their finances.
Offer Multiple Payment Options
One way to minimize risk is to reduce payment friction as best as possible. For example, you could offer various payment methods, such the following:
- Credit cards
- Bank transfers
Offering multiple methods can help ensure that customers can use the payment method they prefer. Convenience improves the likelihood of them prioritizing your payments over other debts and expenses.
Use Metrics To Identify Creditworthy Customers
Companies can rely on more than one method to manage payments. They can opt for cash in advance or leverage the hybrid method and use payment history to determine who becomes eligible for receiving credit. This approach provides a solid incentive for maintaining a positive payment history, especially for new businesses looking to build credit.
How Can Gaviti Help Companies Administer the Pay on Delivery Method?
Our developers designed our software with credit in mind. It helps companies pursue payments with more long-term payment schedules, such as 30 days. Even so, the AR team can configure the settings to send an invoice immediately after placing an order or after receiving delivery. The system can also help the company ensure prompt payment for the customers it has chosen for credit extensions. Are you ready to see it in action? Book your Gaviti demo today.