UNIT 4: Terms, Dating and Credit Management

This module is structured to explore the concepts of credit terms and dating as
outlined in economic and financial literature. The timing aspect, which encompasses
deciding when payments are due, is typically dictated by the terms of sale, commonly
denoted on bills or invoices. These terms delineate the credit period.

Learning Outcomes

After completing this unit, the student will be able to:

• Demonstrate proficiency in working capital management by understanding variability,

discussing cash, credit, receivables, and inventory management, and applying metrics to
optimize financial performance.

Pretest
Discussion:

1. What are payment terms?

2. What is the significance of the term "dating" in business transactions?

Great job on completing the test, and thank you for your participation. Moving
forward, the next section delves into the content of this unit, focusing on working capital
management, cash flow, credit management, and inventory management. These topics are
essential for optimizing financial performance.
 Content

I. Exploring the Difference Between Cash Before Delivery and Cash on Delivery

Activity 1: Photo Analysis

Instruction: Analyze the given photos and answer the following questions that are given below:

Answer the questions:

1. What is being implied in the picture/s?

2. Without surfing the internet, can you differentiate cash on delivery between cash
before delivery?

As emphasized in literature on economics and finance, a credit transaction entails the exchange
of goods, services, or other valuables with commitments to settle payment at a later date.

The timing aspect, concerning when payment is due, is typically regulated by the terms of sale,
commonly known and indicated on bills or invoices as payment terms. During the progression of
business operations and growth, the descriptive term "dating" gained widespread and popular usage
to denote a deviation from standard terms, wherein the payment deadline is extended due to specific
circumstances or contingencies. During the progression of business operations and growth, the
adjective "dating" gained widespread popularity to signify a deviation from standard terms, whereby
the payment period is extended due to specific circumstances or contingencies.

II. Lack of uniformity in Terms

In the realm of business practice, it's evident that there is minimal consistency in the utilization
of terms. Although certain trades have managed to establish and enforce uniform terms through
collaboration among credit grantors, other trades lacking such cooperation often witness frequent
modifications, and occasionally, outright disregard for established terms. Terms fluctuate across
different trades and sometimes even within the same trade, as various businesses may offer differing
terms.
• It's possible for a single seller to provide different terms to different customers, and
occasionally, even to the same customer.
• This practice often stems from a desire to gain a competitive edge, although it can also result
from pressure exerted by large-scale buyers.
 • However, experience consistently demonstrates that such advantages are short-lived. This is
largely because variations in terms typically serve as nothing more than an artificial
competitive tactic, with any apparent benefits ultimately proving illusory.
• This approach typically leads to buyers pitting sellers against each other, creating an unhealthy
dynamic within the trade.
• It's important to emphasize that fair and consistent terms across the trade foster healthy
practices and ultimately benefit both buyers and sellers in the long term.

Factors in Fixing Terms

Broadly speaking, numerous factors influence the determination of terms. Some of these factors
include the nature and intended use of the product, its geographical location, the customer's specific
circumstances, the purpose of the purchase, the buyer's creditworthiness, and the guidelines outlined in
fair practice codes.

1. The commodity factor – The nature of the commodity typically dictates the terms of sale.
• Perishable goods such as fish, vegetables, and poultry are usually sold on a cash basis
or with very short-term payment conditions.
• It's widely acknowledged that essential products enjoy high demand due to their
universal necessity, unlike luxury or non-essential items which have limited markets.
Essentials are typically sold on a cash basis, while luxuries are often offered on credit
terms.
• To stimulate sales of luxury items, discounts and credit terms are sometimes
provided.
• Additionally, items like pianos and household appliances are commonly sold on
installment plans, allowing for longer payment periods.
• Deals primarily revolving around labor, compensated in cash by the seller,
typically adhere to cash or extremely short payment terms. Charges for labor
performed on the customer's materials can range from immediate payment
to a 60-day net term.
• Certain large agricultural machinery like harvesters and threshers are often
sold on installment plans, with the seller receiving payment through a finance
company while granting the buyer ample time for repayment. This applies
similarly to bulldozers, road graders, and other heavy equipment.

2. Geographic Considerations
• In several instances, sellers take into account the distant location of buyers and
consequently adjust their terms. This adjustment might manifest as an additional 30-
day period for bill payment or by extending the timeframe for discount eligibility.
• For instance, if the usual condition for availing a discount is payment within 15 days
from the invoice date, the seller may permit the buyer to enjoy the cash discount by
paying within 15 days from the receipt of the goods.
• In such scenarios, terms are occasionally indicated as "15 days, R.O.G.," denoting
payment within 15 days from the receipt of goods.
3. Seasonal Dating
• The standard trade terms typically pertain to immediate shipments of orders received
for immediate delivery, such as pulp and paper intended for printing or newspaper
publications.
• However, in industries with seasonal fluctuations, it's often necessary to place
"advance" orders, referring to orders scheduled for later delivery to coincide with
market demand. This is common for items like raincoats, umbrellas, school bags, and
school uniforms.
• These advance orders afford manufacturers or importers sufficient time to prepare
merchandise, allowing for better planning and more cost-effective operations. Orders
may be received well in advance, with a designated shipping date.
• For example, certain bookstores in the Visayas region place textbook orders with
publishers as early as the onset of summer, ensuring they can fulfill demand during the
school opening in June.

4. Terms in Retail Trade

The majority of retailers, if not all, offer credit to loyal customers who sustain their
patronage over time. However, the terms of retail credit can differ from one retailer to
another.
• Typically, such customers are expected to make monthly payments to reduce their
outstanding balances.
• In rural areas, esteemed customers often make periodic partial payments in line with
agreements between sellers and buyers.

5. Standing of the Customer

It is evident that a connection exists between extending credit and the timing of payment.
As long as payment remains outstanding, the risk of credit default persists. Consequently,
some cautious entrepreneurs choose not to offer goods on credit to customers with
questionable integrity or uncertain financial capability.
• In certain instances, the seller may choose to provide a minimal quantity of goods on
credit terms to such customers.
• Occasionally, the credit timeframe may be shortened, for example, from 45 days to
around 15 days.

6. Cash Terms
If there is a decision not to offer credit under any circumstances, it must be explicitly
stated that goods will only be delivered to the buyer upon the seller's receipt of funds
equivalent to the value of the ordered goods.
• This approach aligns with the principle of "Cash before Delivery," often abbreviated
as C.B.D.
• It specifically pertains to transactions where the seller requires cash payment prior to
the delivery of goods, serving as a robust safeguard for the seller's interests.
• The widely practiced method in business transactions is commonly referred to as
C.O.D., which stands for "Cash on Delivery."
 • To safeguard their interests, many businessmen insist on cash payments or a certified
check issued by the buyer. However, in cases where buyers and sellers have a
longstanding satisfactory relationship, this requirement is often waived.
• Some businessmen are willing to transport goods to valued customers even without
a promise of payment.

Other Terms

Now, let's consider other terms that govern trade transactions. Although they are often
recognized by their commonly used abbreviations in trade, it's important to acknowledge that their
fundamental characteristics serve to distinguish them from one another. In summary, these terms
include:

1. End of the Month

The frequency of purchases or specific circumstances may require special treatment for
certain individual cases. One such special arrangement is known as "E.O.M." or "End of Month."

• This arrangement arises from the active buyer's need for payment convenience and the
seller's desire to encourage concentrated business.
• E.O.M. requires the buyer to issue checks to the seller throughout the month to qualify
for discounts, streamlining the seller's bookkeeping process.
• In many sectors, this arrangement is now commonly permitted beyond just active
accounts.
• Under this setup, all shipments made within a given month are treated as though they
occurred on the last day of the month, with terms running from that date.
• For example, shipments made on any day in September are considered dated as
September 30th. If the terms are, for instance, 2 percent, 10 days, changing to 2 percent,
10 days, E.O.M. means that September bills are due on the tenth of October, instead of
within 10 days from their various September dates.
• Sometimes, a variation of the E.O.M. arrangement is adopted, entailing two payments
per month. Under this plan, bills dated from the 1st to the 15th of the month are
considered as if they were dated from the 16th to the end of the month, effectively
treated as due on the last day of the month.
• Thus, in a buyer's market, a savvy buyer may request additional dating without
substantial cause.
• Similarly, the seller may accede to the pleas of buyers citing special circumstances,
such as the opening of a new store or the construction of a new building.
• Commonly cited reasons for requesting special dates or limitations on purchases for a
period include various factors.
• It is assumed that the buyer must maintain good financial management, a
consideration typically taken into account when requesting additional dating.
• However, granting consent could potentially increase risk, although there may be
some justifications in exceptional cases where the setup is fundamentally sound.
• Numerous factors justify the reduction of terms. Business turnover has accelerated
significantly due to faster distribution facilities and a trend toward purchasing smaller
quantities and maintaining smaller stocks.
 • The involvement of finance companies in installment transactions allows
manufacturers to receive payment for their shipments upon delivery.
2. Discounts
• A key component of the terms is the provision for discounts.
• In addition to specifying the maturity of the bills, the terms may also outline the periods
before maturity during which cash discounts are applicable.
• In fact, there seems to be a significant amount of confusion surrounding the topic of
discounts.
• A cash discount pertains to the amount offered for payment made before the bill
reaches maturity. Such early payment reduces the seller's credit risk and allows for
quicker access to funds. Consequently, the seller grants a discount, typically exceeding
the prevailing bank interest rate.
• For instance, if the terms are 1 percent, 10 days, net 60 days, it implies that the buyer
can wait for 60 days from the bill's date before paying the full amount. However, if the
buyer pays the bill within 10 days of its date, they are entitled to a 1 percent discount.
In essence, the seller receives payment 50 days before maturity and grants a 1 percent
discount, roughly equivalent to an annual interest rate of about 7 1/2 percent.
A. Cash Discounts
• It represents the cost incurred for settling funds ahead of schedule, a circumstance that
arises when the terms permit the buyer to make a payment on a specified date, net, or
prior to that date, with a deduction for a discount.
• This discount serves as an incentive to encourage early settlement of the bill.
B. Trade Discount
• It is designed as a deduction from the price.
• The availability of discounts on published price lists allows for greater price flexibility
concerning varying purchase quantities and changing market conditions.
• Additionally, discounts may serve as allowances granted at the end of a specified period
for purchases surpassing predetermined amounts.
• As part of a marketing strategy, discounts aim to foster robust business relationships
between sellers and buyers.

Conclusion

In summary, exploring the differences between C.B.D. and C.O.D. and examining trade terms and
practices reveals the complexity of business transactions. Timing and conditions surrounding payments
are crucial factors shaping operations. Lack of uniformity in terms highlights the need for flexibility, with
traders opting for variations to gain advantages. Geographic factors, seasonal variations, and customer
status further complicate negotiations, requiring a nuanced approach. Discounts, whether cash or trade,
serve as strategic incentives to promote early payments and strengthen relationships. Understanding
these dynamics is essential for effective commercial navigation, optimizing operations, and fostering
enduring partnerships in business.

Thank you for reading the content. Now that you had learned about the difference between cash
on delivery and cash before delivery along with the elements of terms and dating, you may do the
succeeding learning activities. If you have questions regarding the activity, you may contact me to
the number indicated in the course guide.
 Learning Activity

A. True or False. Identify whether the statement is true or false.

1. Dating becomes part and parcel of the terms of the credit period.
2. It is possible that the same seller may differ in the terms granted to customers and
sometimes in the terms granted to the same customer.
3. The nature of the commodity generally circumscribes the terms of credit.
4. Perishable products like fish and vegetables are generally sold on credit basis.
5. Construction materials are generally obtained by well-known manufacturing firms engaged
in housing projects on differed payment
6. Cash on delivery applies specifically to transactions in which the seller receives the cash
payment as a condition to delivery of goods, an ironclad protection to the seller’s interest.
7. The most common practice in business transactions is known popularly as Cash Before
Delivery
8. E.O.M. makes it necessary for the buyer to issue checks to the seller throughout the month
in order to earn discounts.
9. Cash discount refers to the amount allowed for payment prior to the maturity of the bill.
10. The discount is the bonus offered to induce the earlier payment of the bill.

Assessment

1. Explain the lack of uniformity in terms observed in business practices. Provide examples to
support your explanation.
2. Describe the practice of discounts and its role in fostering business relationships between sellers
and buyers.

Congratulations!!!!!! You did a great job! Keep on learning. If you have questions about the
lesson please don’t hesistate to contact your instructor via FB messenger/text/call. God Bless!