Guest blog by James Boorman, Project and Corporate Finance Advisor and Founder of New African Projects and Business Ltd.
In the latest in a series of informative guest blogs that look at issues around financial management issues for women entrepreneurs, this week we get a better understanding of Incoterms why they matter to Lionesses, particularly for those businesses that import and export.
The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). They are widely used in International commercial transactions or procurement processes. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods. Incoterms rules are periodically updated, with the latest version, Incoterms 2010 being published on 1st January 2011.
So, here’s a question for you - do you know your FOB from your FAS; or your DAP from your DDP? In today’s blog, all is revealed.
We’ve all been there, a friend has said for years that they owe you dinner, a date is arranged and when it comes to paying the bill there is silence from the other side of the table… “Shall we split the bill?”, suddenly becomes an option, or worse - “I seem to have left my wallet/purse at home!”
With a dinner, it’s just a matter of leaving a sour taste in the mouth, but with your business it could make the difference between Profit and Loss. “Never Assume!”, sort out the rules of engagement or ‘Incoterms’ early.
So what are Incoterms?
The Incoterms rules have become an essential part of daily trade. They ensure that there is never any doubt as to who has the responsibility, who pays the bill, and when the risk changes hands...
RULES FOR ANY MODE OF TRANSPORT
An easy way to remember - look at the first letter ‘E’, ‘F’, ‘C’ and ‘D’:
‘E’ terms cover departure of the goods - transport costs paid by buyer.
‘F’ terms are characterized by the main costs being covered by the buyer.
‘C’ terms the seller pays all the fees up to delivery at a foreign port.
‘D’ terms describe different methods of delivery of goods and represents the arrangements with the maximum amount of responsibility (both for costs and risks) to the seller, not the buyer.
I shall describe the main Incoterms all from the basis of what the Seller is expected to do and pay, all other costs/risks for the Buyer (remember the Seller needs signed receipt of goods and provide all necessary documents to Buyer). Note, apart from EXW, the Seller always provides Export Clearance...
Job done for the Seller when the goods are delivered…
- EXW ‘Ex Works’
...to the Buyer at the factory door…
- FCA ‘Free Carrier’
...to the named point and provide evidence to the Transport company named by the Buyer.
- CPT ‘Carriage Paid To’
...to the first carrier or another person at an agreed place (Seller arranges and pays the freight costs and provides export documents).
- CIP Carriage And Insurance Paid To
...same as CPT but Seller arranges for and pays for minimum Insurance (Hint - the Buyer may want to buy extra insurance).
- DAT Delivered At Terminal
...to the Buyer at a named terminal at the named port or place of destination. Buyer pays the import duty/taxes/customs costs.
- DAP Delivered At Place
...same as for DAT but Seller delivers to final destination, Buyer to pay for final unloading and import duty/taxes/customs costs.
- DDP Delivered Duty Paid
...to the named place with import clearance (Seller pays import Duties and other custom formalities). Buyer has only to unload the goods at the final destination.
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
- FAS Free Alongside Ship
...alongside the vessel (e.g. on the quayside) nominated by the buyer at the named port of shipment.
- FOB Free On Board
...on board the ship, bill of lading provided by Seller and pays any loading costs not included in freight costs.
- CFR Cost and Freight
...on board the ship (pay loading), arrange and pay freight (often includes some unloading costs) to the named port of destination.
- CIF Cost, Insurance and Freight
...same as CFR except Seller arranges for and pays the insurance (minimum cover only - The risk of loss of or damage to the goods passes when the goods are on board the vessel. Hint - the Buyer may want to buy extra insurance).
Here is a useful ‘Cut out and keep’ from my friends at the International Credit and Trade Finance Association (ICTF):
Look out for next week’s blog topic: I want to sell 25% of my company to a friend - just how much is my company worth?
James Boorman, 22 years in the Financial Markets in London trading many different products from FX to Interest Rates to Commodities to Futures and Options, before being relocated by Credit Agricole in 2007 to Johannesburg as an Investment Banker, Head of their Financial Institutions Department, sub-Saharan Africa. He now spends his time with his family in South Africa whilst advising on Project and Corporate Finance deals. He adds significant value in the foreign exchange value chain to those companies who do not have the necessity or resources to justify a full time Treasury professional or department, but still need to ensure that their market risks are managed (and their sleep patterns undisturbed). Seen here planting Bamboo in Mozambique.
Read more articles by James