The COD Roll

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A company usually imposes cash on delivery (COD) terms on those customers who have run up a credit balance and have a poor record of paying it down again. However, COD terms do nothing to eliminate outstanding invoices. Instead, the company's overdue receivables balance over 90 days old increases in size. This can be a problem if the company is borrowing against its line of credit, and the bank excludes old receivables from the borrowing base.

One solution is to require a small payment in addition to the COD payment being made for a current delivery. However, this can take an inordinately long time to reduce the outstanding receivable balance. Instead, consider using the COD roll. Under a COD roll plan, the customer pays COD for a current delivery, but the company applies the payment to the oldest invoice outstanding. By doing so, the company rapidly reduces the amount of its oldest invoices. In addition, the customer reduces its finance charges, since the oldest invoices are now being eliminated.

The main difficulty with a COD roll is reconciling the outstanding invoices, since payments are being applied against invoices other than those to which they appear to apply. Also, if a delinquent customer does not regularly place new orders with the company, then its overdue invoices will still become excessively old over time.

Podcast

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