Cash on Delivery (COD)

Cash on Delivery (COD) is a payment method in which the buyer pays for goods at the time they are delivered rather than when the order is placed. Payment can be made in cash, by card, or through the courier’s payment system. COD is common in retail, e‑commerce, and local services where buyers lack credit access or prefer to inspect items before paying.

How COD works

1. Customer places an order and selects COD as the payment option.
2. Seller prepares the invoice and ships the goods with COD instructions.
3. Courier delivers the item and collects payment from the buyer.
4. Courier deposits or remits the collected funds to the seller, often after deducting handling fees.

Timing and exact steps vary by carrier and region; some couriers hold funds briefly before transferring them to the merchant.

Accounting and operational implications

• Accrual accounting (required for public companies under GAAP): revenue is recognized when the sale occurs; if payment is deferred until delivery, the amount is recorded in accounts receivable until collected.
• Cash accounting: revenue is recorded only when payment is actually received.
• COD shortens days‑receivable relative to credit sales but still carries the risk of return at delivery.
• Operationally, COD requires robust coordination with logistics partners, clear return policies, and mechanisms to handle refused deliveries and deposits.

Benefits

• Increases buyer confidence for sellers with limited brand recognition.
• Enables purchases by customers without credit or digital payment access.
• Reduces seller exposure to certain electronic payment risks (chargebacks, fraud related to card disputes).
• Can improve short‑term cash flow if carriers remit funds promptly.

Risks and disadvantages

• Higher likelihood of delivery refusal, causing return shipping costs and lost margin.
• Operational complexity: handling refusals, returns, and reconciliations increases costs.
• Potential cash handling risks for couriers and sellers (security, errors).
• Buyers may find returns more difficult and sellers may limit or refuse COD returns.
• Carriers often charge handling or remittance fees that reduce seller revenue.

COD vs. Cash in Advance

• COD: goods are shipped before payment; buyer pays on delivery. Benefits buyers (inspect before paying) but exposes seller to refusal risk.
• Cash in advance: buyer pays before shipment (e.g., prepaid card, bank transfer). Protects sellers from nonpayment but shifts risk to buyers (delivered goods may not meet expectations).
  Which to use depends on the seller’s risk tolerance, customer base, and operational capacity. Larger or international sellers often prefer cash in advance to eliminate credit risk; smaller or regionally focused sellers may offer COD to boost conversions.

Common examples

• Food delivery paid when the driver arrives (cash or card).
• Courier parcel deliveries with payment collected on receipt.
• Local services (dry cleaning, repairs) where payment is made on pickup.

Best practices for merchants

• Limit COD to proven customers, lower‑value items, or regions with low return rates.
• Partner with reliable carriers that offer secure collection and timely remittance.
• Clearly state COD fees, return policies, and accepted payment types at checkout.
• Consider partial deposits or pre‑authorization to reduce refusal rates.
• Track COD performance (refunds, refusals, days to remit) and adjust terms accordingly.

Key takeaways

• COD lets buyers pay on delivery, appealing where credit or digital payments are limited.
• It can improve buyer trust and short‑term cash flow but increases operational risk and return costs for sellers.
• Choose COD or cash in advance based on your risk tolerance, customer profiles, and logistics capabilities; apply controls and policies to minimize refusal and return costs.