COD roll

The typical approach that a seller uses to deny credit to its customers is to switch them to cash on delivery (COD) terms once they consistently fail to pay in a timely manner. However, taking this approach means that the seller no longer has any leverage over its COD customers in regard to their old outstanding invoices, which will continue to age and will probably be written off as bad debts.

A way to ensure that the oldest invoices are eventually paid is to require COD payment on new customer orders, but the seller applies the resulting payments to the oldest invoices outstanding, rather than the invoice that was actually paid. By doing so, the oldest invoices are gradually cleared from the seller's books. This approach means that only newer invoices remain in the seller's accounts receivable aging report, which can be used as collateral for short term loans. An advantage to the buyer is that payments are being made against old invoices for which late payment penalties would otherwise be accrued, so the payments are also reducing the amount of finance charges that they may eventually have to pay.

Of course, there can be some confusion between the seller and its COD customers regarding how many invoices are still overdue, since the buyer will apply payments against new invoices, while the seller applies payments against old invoices. Also, the COD roll approach only works as long as COD customers continue to buy from the seller. If they stop, then there will still be a significant number of unpaid invoices outstanding.

Related Courses

Credit and Collection Guidebook 
Effective Collections