What it means
COD sits between prepayment and credit terms. The seller ships without holding the customer's money, but does not release the goods until payment is handed over, so ownership and cash change hands at the same moment.
It is common where card use is low, where buyers do not yet trust online sellers, and in trades such as fuel, building materials and food distribution. Many businesses also use it as a step down for customers whose credit account has been suspended for late payment.
The costs are easy to underestimate. Carriers charge a fee per COD parcel, the collected money can take several days to reach the seller's bank, and a refused delivery means paying freight in both directions for no revenue at all.
Handling physical cash also creates control and safety issues for drivers, which is why many carriers now settle COD by card terminal at the door. The accounting treatment is unchanged either way: revenue is recognised on delivery, and no trade receivable arises because nothing is owed afterwards.
The surrounding terms overlap and cause confusion. Cash before delivery means the money must clear before goods leave the warehouse, while collect on delivery describes the same arrangement as cash on delivery under a name that acknowledges card payment.
Reading the carrier's own definition before signing matters more than the label used.
In practice
Real-world examples.
Example
A heating oil supplier delivers to rural households on COD terms because tank fills vary in size and setting up credit accounts for occasional customers is not worth the administration.
Example
An electronics retailer offers COD as a payment option in a market where card penetration is low. It accepts a 7% refusal rate as the price of reaching customers who would otherwise never order online.
Example
A builders' merchant moves a contractor from 30-day credit to COD after three missed payments. The contractor keeps buying, and the merchant stops accumulating exposure while the old balance is repaid in agreed instalments. Credit terms are restored only once the arrears are cleared in full.
Think of it
“Cash on delivery means pay when you receive it-no credit extended.
Formula
Calculation
Net cash from COD = (Orders delivered x Average order value) - COD fees - Return freight on refusals.
An online homeware seller ships 200 COD orders a month at an average value of $85, so $17,000 of goods leave the warehouse. The carrier charges $3.50 per COD order, which is 200 x $3.50 = $700, and 8% of orders are refused at the door, being 16 orders worth 16 x $85 = $1,360 of lost sales plus 16 x $6 = $96 of return freight. Cash actually collected is $17,000 - $1,360 = $15,640, and after $700 + $96 = $796 of costs the seller nets $14,844.Case study
Seen in the real world.
Verity Kitchenware is a fictional online cookware seller, described here as an illustrative example. It launched COD to widen its market and saw orders jump by 40% in two months, which the founders read as clear success.
The quarterly numbers told a different story. Refusals ran at 14% on orders above $120, mostly impulse purchases the buyer had cooled on by delivery day, and each refusal cost outbound and return freight plus a restocking check.
The fix was to cap COD at $100 per order and require prepayment above that, along with a confirmation message the morning of delivery. In this illustrative case refusals fell to 5% and the COD channel became genuinely profitable rather than merely busy.
Order volumes did dip by about 8% once the cap was in place, which the founders of this fictional business had expected. The orders they lost were the ones that had been costing them freight in both directions, so gross profit from the channel rose even as the headline order count fell.
Watch out
Common mistakes.
- Treating COD as risk free because payment is guaranteed. The risk moves from bad debt to refused deliveries, wasted freight and goods that come back damaged.
- Recognising revenue when the order is shipped. With COD the sale is complete on delivery, so goods in transit are still stock, not sales.
- Ignoring the delay before the carrier remits the money. Several days between collection and settlement can matter a great deal for a business running a tight cash position.
Questions
People also ask.
Does COD improve cash flow?
Generally yes compared with credit terms, because money arrives on delivery day instead of 30 or 60 days later.
Is COD still cash if the customer pays by card at the door?
In practice yes, the term now covers payment on delivery by any method, though card settlement takes a day or two longer to land.
When should a seller stop offering COD?
When refusal rates or handling fees cost more than the extra sales the option brings in, which is worth measuring by order value band.
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