How do you use trade terms to optimize your cash flow and working capital?

1 Why trade terms matter

Trade terms are essential for clarifying the roles and obligations of each party in a trade transaction. They can have a significant impact on your profitability, cash flow, and risk exposure. For example, if you are an exporter, you may prefer to use trade terms that transfer the ownership and risk of the goods to the buyer as soon as possible, so that you can get paid faster and avoid liability for any damage or loss during transit. On the other hand, if you are an importer, you may want to use trade terms that give you more control and visibility over the delivery and inspection of the goods, so that you can ensure their quality and compliance.

2 How to choose trade terms

In 2020, the International Chamber of Commerce published the latest version of Incoterms, which includes 11 trade terms that are divided into two categories: rules for any mode of transport and rules for sea and inland waterway transport. Each trade term has a three-letter code and a description that specifies the point of delivery, the division of costs, and the allocation of risk between the seller and the buyer. When choosing the most suitable trade term for your contract, you should take into account various factors such as the nature and value of the goods, the mode and cost of transport, customs and regulatory requirements, payment terms and methods, as well as the level of trust and communication between the parties.

3 How to apply trade terms

When selecting a trade term that meets your needs and expectations, you should use the official Incoterms code and version (e.g., FCA 2020) without any modifications or additions. You should also specify the place of delivery or destination as accurately as possible, including the country code if necessary. Additionally, you need to indicate who is responsible for arranging and paying for the transport, insurance, and customs clearance of the goods, as well as confirm the delivery date and time, and the method of proof of delivery. Lastly, it is important to communicate clearly and promptly with your counterpart and any intermediaries involved in the transaction, informing them of any changes or issues that may affect the performance of the contract.

4 Benefits of using trade terms

Incorporating trade terms into your contracts can bring various advantages, such as decreasing the uncertainty and ambiguity that could result from different interpretations. It can also enhance the efficiency and transparency of the trade process by streamlining communication and documentation. Additionally, it can improve cash flow and working capital management by coordinating payment terms and methods with delivery terms and risks. Furthermore, it can minimize disputes and delays that may arise from misunderstandings or disagreements over the obligations and liabilities of each party, as well as increase competitiveness and customer satisfaction by providing flexible and reliable solutions that meet both parties' needs and preferences.

5 Best practices for using trade terms

To make the most of trade terms in your contracts, it is important to review them regularly and update them as needed, to reflect changes in the market conditions, regulations, or customer demands. Compare the trade terms offered by different suppliers or buyers, and negotiate the best deal for your business considering the total cost and value of the transaction. Additionally, educate yourself and your staff on the meaning and implications of trade terms, and seek professional advice if you have any doubts or questions. It is also important to monitor the performance and compliance of the contract, and report any problems or deviations as soon as possible. Finally, build trust and cooperation with your trade partners, and resolve any issues amicably and constructively.