Glossary of Trade Finance and Supply Chain Management

Cash Conversion Cycle

The cash conversion cycle (CCC) is an efficiency metric that measures the time it takes a company to convert its investments in inventory and other resources into cash. The CCC is calculated by adding the number of days sales outstanding (DSO) and the number of days inventory outstanding (DIO) and then subtracting the number of days payables outstanding (DPO).

Days Sales Outstanding (DSO) measures the average number of days that it takes a company to collect payment after a sale has been made. A lower DSO indicates that a company is collecting its receivables more quickly.
Days Payables Outstanding (DPO) measures the average number of days that a company takes to pay its bills. A higher DPO indicates that a company has successfully negotiated advantageous credit terms.
Days Inventory Outstanding (DIO) measures the average number of days that a company holds its inventory before it is sold. A lower DIO indicates that a company is able to turn over its inventory more quickly.

Payment Terms

In international trade, there are several methods of payment that can be used to facilitate the exchange of goods and services between buyers and sellers. Some of the most common methods include:

Open account: This is the most common method of payment in international trade, and it involves the buyer and seller agreeing to terms of payment after the goods have been shipped. The buyer pays the seller directly, usually within a specified period of time.
Documentary collections: This method involves the use of documents, such as bills of lading and commercial invoices, to facilitate the exchange of goods and payment. The seller provides the required documents to their bank, which then forwards them to the buyer's bank. The buyer's bank releases the documents to the buyer once payment is received.

1. Cash Against Documents (CAD): is a method of payment in which the buyer pays cash to the seller or the seller's bank in exchange for the shipping documents, such as a bill of lading or airway bill, which are required to take possession of the goods. This method is used when the buyer wants to take possession of the goods as soon as possible, and the seller wants to be paid in cash before releasing the documents.

2. Documents Against Acceptance (D/A): is a method of payment in which the seller sends the shipping documents, such as a bill of lading or airway bill, to the buyer. The buyer accepts the documents by signing them, and promises to pay for the goods at a later date by providing a draft or promissory note. This method is usually used when the buyer has a good credit standing and the seller is willing to extend credit. The buyer takes possession of the goods, and the seller bears the risk of non-payment.
Letters of credit: This method involves the buyer's bank issuing a letter of credit in favor of the seller, which guarantees payment once the seller has met certain specified conditions. The seller must provide the required documents, such as bills of lading and commercial invoices, to the buyer's bank before payment is released.
Advance payment: This method of payment involves the buyer paying for the goods or services before they are shipped. This type of payment is usually used in situations where the buyer and seller do not have an established credit relationship.

Incoterms

INCOTERMS (International Commercial Terms) are a set of internationally recognized trade terms developed by the International Chamber of Commerce (ICC) that are used in international trade contracts to clearly define the responsibilities and rights of buyers and sellers in relation to the delivery of goods. They specify the obligations of the buyer and seller, including who is responsible for the cost of transportation, insurance, customs clearance, and other expenses associated with the delivery of the goods. The most commonly used INCOTERMS are EXW, FOB, CIF, CPT, DAP, and DDP. The use of these terms helps to ensure a common understanding between the parties involved in the trade transaction and reduces the risk of misunderstandings or disputes. It is important to note that the choice of incoterm impacts the responsibilities and costs of both the buyer and the seller, and it should be carefully considered and agreed upon by both parties before signing the contract.

EXW (Ex Works): The seller's only obligation is to make the goods available at their premises. The buyer is responsible for all costs and risks associated with the transportation of the goods, including arranging and paying for transportation, loading and unloading the goods, and obtaining any necessary export or import licenses.
FOB (Free on Board): The seller is responsible for getting the goods to the port of shipment and loading them onto the shipping vessel. The buyer is responsible for the costs and risks associated with transportation of the goods from the port of shipment to the final destination, including arranging and paying for transportation, unloading the goods, and obtaining any necessary import licenses.
CIF (Cost, Insurance, and Freight): The seller is responsible for the cost of the goods, freight, and insurance to the port of destination. The buyer is responsible for the costs and risks associated with unloading the goods and clearing customs, as well as arranging and paying for transportation from the port of destination to the final destination and obtaining any necessary import licenses.
CPT (Carriage Paid To): The seller is responsible for arranging and paying for the transportation of the goods to the agreed upon destination. The buyer is responsible for the costs and risks associated with unloading the goods and clearing customs, as well as obtaining any necessary import licenses.
DAP (Delivered at Place): The seller is responsible for arranging and paying for the transportation of the goods to the agreed upon destination, but the buyer is responsible for the costs and risks associated with unloading the goods and clearing customs, as well as obtaining any necessary import licenses.
DDP (Delivered Duty Paid): The seller is responsible for the cost of the goods, transportation, and customs clearance and delivery to the final destination. The buyer has no additional responsibilities, but should be aware that they may have to pay any taxes or duties imposed by the importing country.

Glossary of Trade Finance and Supply Chain Management

Cash Conversion Cycle

Payment Terms

Incoterms

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Glossary of Trade Finance and Supply Chain Management

Cash Conversion Cycle

Payment Terms

Incoterms

Lastest blog posts

Ready to get started?

Lastest blog
posts