由 caicai8478 Core Question: How Does DDP+COD Exacerbate Cash Flow Pressure and Risk?
Extremely Long Fund Advance Payment Cycles:
Traditional Model: Customers pay first, and you use their funds to organize production and shipment.
DDP+COD Model: You must advance all costs (product cost, first-leg freight, customs duties and VAT, and final freight). Only after the goods are signed for can you begin the lengthy payment process. This cycle can take 30-60 days or even longer.
Large Capital Ties:
DDP Taxes and Fees: Customs duties and VAT (VAT) are often a significant percentage of the goods’ value (e.g., 10%-30%). This amount must be paid to customs in advance, representing a pure cash outlay.
Logistics Costs: International freight and local delivery fees are high.
COD Fund Deposits: Payments collected remain in the logistics provider’s account and require periodic settlement.
High-risk events impact cash flow:
High rejection rate: If a customer rejects a shipment, all the round-trip freight and taxes you’ve paid will be lost, and the inventory value will be depreciated.
Customs clearance delays/issues: Goods held at customs can result in high unexpected costs such as warehouse rent and fines.
Exchange rate fluctuations: Over long periods, fluctuations in the exchange rate between your home currency and the destination country’s currency can erode profits.
To better understand this pressure, the following chart compares the cash flow cycles and risk points under the traditional model and the DDP+COD model:
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I. Managing Cash Flow Pressure: Protecting the Lifeline of the Business
- Accurate Costing and Pricing
Action: Develop a refined pricing model that incorporates all costs (see the previous article on cost structure).
Key: Separately account for and make explicit DDP taxes and COD handling fees. In pricing, don’t simply consider them as part of “freight”; instead, manage them as separate items to clearly understand how much cash you’ve paid for taxes on each order.
- Optimize payment terms and reduce advance payment.
Action: Try introducing partial advance payment.
For example, set up a “partial advance payment + COD final payment” model. Customers pay a 20%-30% deposit when placing an order, with the balance due upon delivery.
Benefit: This deposit can cover your product costs and even part of the shipping costs, significantly reducing your initial cash outflow pressure.
- Negotiate favorable settlement terms with logistics providers.
Action: Negotiate with freight forwarders/logistics providers:
Freight settlement cycle: Strive for monthly or longer payment terms, rather than prepaying per shipment.
COD payment cycle: Choose a logistics provider with faster payment times (e.g., weekly vs. monthly).
COD handling fees: Strive for more competitive rates.
- Supply chain financing and financial instruments.
Action: Explore the use of financial instruments:
Accounts receivable financing: Use the COD receivables from the logistics provider as collateral to apply for a short-term loan from a bank or financial institution, securing the majority of the payment upfront.
Export Trade Financing: Partner with banks to obtain financing based on your order and trade background.
Cash Flow Management Tools: Use services like “early payment” (such as Alibaba’s One-Day Pass and PingPong’s early payment services) to collect the majority of the payment immediately after goods are signed for, paying a certain handling fee.
II. Risk Management: Building a Safety Net
- Strictly Control Buyer Rejection Risk (the greatest risk associated with COD)
Actions:
Market Screening: Prioritize COD in markets with low rejection rates and good credit environments (such as Western Europe), and be cautious when entering markets with high rejection rates.
Product Screening: Only use COD for standardized, high-margin products with no size issues.
Pre-shipment Communication: Confirm order information and estimated delivery time via email or SMS before shipment to reduce rejections due to incorrect addresses or unavailable delivery recipients.
Logistics Tracking and Exception Intervention: Track packages in real time and proactively contact customers immediately if you notice signs of delivery failure (such as “wrong address” or “unable to contact customer”).
Set Rejection Rate Redline: Monitor rejection rates daily/weekly. If the rejection rate for a product or channel exceeds a preset threshold (e.g., 15%), immediately suspend its COD service and analyze the reasons.
- Mitigating Customs Clearance Risk (the biggest risk with DDP)
Action:
Partner Selection: Choose an experienced freight forwarder with extensive experience in customs clearance in the destination country (see previous article); they are your first line of defense.
Truthful Declaration: Resolutely avoid under-declaration or misrepresentation of product names. If customs deem this fraudulent, you risk heavy fines, cargo destruction, or even blacklisting. Compliance is a long-term strategy.
Document Preparation: Ensure all customs clearance documents (commercial invoices, packing lists, certificates of origin, etc.) are accurate, complete, and consistent.
Product Compliance: Ensure that products fully comply with the safety, environmental, and certification standards of the destination country.
- Managing Exchange Rate Fluctuation Risk
Action:
Local Currency Quotation: Whenever possible, settle and quote in your local currency (e.g., RMB) to transfer exchange rate risk to the buyer or logistics provider.
Lock in the exchange rate: If settlement is in a foreign currency (such as the US dollar or euro), settle the payment immediately upon receipt, or use a bank’s forward exchange settlement facility to lock in a future exchange rate.
- Purchase insurance to transfer risk
Actions:
Freight insurance: Purchase comprehensive international freight insurance to cover damage or loss during transportation.
Credit insurance: Explore purchasing trade credit insurance to protect your COD receivables (although this type of insurance is more targeted at B2B businesses, check with your insurance company to see if they have applicable programs).
- Establish core monitoring indicators (KPIs)
You must monitor these metrics like a dashboard:
Cash conversion cycle: The average time from cash outflow to cash inflow. The goal is to minimize it.
Rejection rate: The core of the core. Monitor by country, product, and channel.
Average advance payment per order: The average amount of cash required for each order.
COD payment cycle: The average number of days it takes the logistics provider to settle the payment.
Unexpected cost ratio: The percentage of sales revenue incurred due to unexpected expenses such as customs clearance issues and fines.
Summary: Action Checklist for Ensuring Fund Security
Calculate Costs: Include all DDP and COD costs when quoting.
Collect Deposits: Implement a “partial prepayment + COD final payment” model.
Select Partners: Partner with reliable freight forwarders that offer good payment terms and fast payment.
Carefully Select Markets and Products: Refrain from shipping low-margin, non-standard products to high-risk markets.
Ensure Process Compliance: Declare truthfully, ensure product compliance, and eliminate customs clearance risks at the source.
Purchase Insurance: Use insurance to cover the risk of significant losses.
Real-Time Monitoring: Keep a close eye on core KPIs like rejection rates and adjust strategies promptly.
Leverage Finance: Leverage tools like accounts receivable financing to mobilize trapped funds.
Through this combined strategy, exporters can enjoy the high conversion rates offered by DDP+COD while maximizing their fund security and achieving sustainable business growth.