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Terms of Sale

See Also:
Net 30 Credit Terms
Net Sales
Credit Sales
Daily Sales Outstanding (DSO)
Commercial Risk

Terms of Sale Definition

Terms of sale definition is the terms which a buyer and seller agree upon. They are as important in exporting as they are with domestic sales. Terms of sale serve the purpose of creating uniform expectations between buyers and sellers. In this way, terms of sale help each party to avoid disagreements which cancel the sale or cause legal liability.

Terms of Sale Explanation

Terms of sale, explained also as the cost, amount, and distribution terms regarding a sale, are essential to a fair deal. They explain, in detail, the exact agreement for a sale: cost, amount, delivery, payment method, payment timing, trade credit, credit terms, and more. They are also essential because they allow each party in a transaction to leave satisfied.

Terms of sale become more important when importing or exporting goods. Here, the terms of sale (incoterms) explain how and when shipping occurs, who pays international duties and taxes, and other factors established by international chamber of commerce regulations. This allows discrepancies to be avoided and properly processed, preventing lawsuits and even international incidents.

Terms of Sale Example

Sophia imports and exports goods to China. She has a hard job; making sure deals are succinct, products are delivered, governments are appeased, and customers are satisfied. She deals closely with terms of sale; 2 10 net 30, delivery paid for by the seller, and she covers the duties.

On a recent shipment of consumer products she is reviewing the terms of sale agreement. This tells her all of the important information regarding the purchase. She makes sure to read the fine print.

In this document she finds a typo which makes the terms unclear. Rather than accepting this she contacts the seller. Sophia knows better than to let this problem go without fixing. Sophia finds, through this, that she and the delivering company have different expectations. Luckily she found this now, so she begins renegotiation. She is able to recover a better deal than she was originally presented with. All of this because she checked the terms of sale international shipping document.

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Ex Works (EXW)

See Also:
Freight on Board (FOB)
Transfer Risk
How to manage inventory
Accounting Principles
Accounting Concepts

Ex Works (EXW) Definition

Ex works is an agreement between a buyer and a seller that the seller assumes no responsibility for the cost or liability for a product after it is produced and has left the seller’s warehouse.

Ex Works (EXW) Meaning

Ex works is the same as Freight on Board (FOB) Shipping. The two terms can be used interchangeably because they assume the same terms and agreement between the buyer and seller. The advantage of ex-works from a seller’s standpoint is that the seller is allowed to recognize revenue once the product has been picked up or a contract has been signed. If a contract has been signed then a seller could potentially recognize revenue as the product finishes going through the manufacturing process. On the other side ex works means that a buyer has a potential for loss for the transportation part of the purchase.

Ex Works (EXW) Example

Wawadoo Inc. is a company that specializes in the production of widgets. Wawadoo was recently able to sign ex works shipping terms with another company named, Wanna Widget Inc. Due to these terms, Wawadoo can save on the transportation cost associated with the charge focus solely on production. This becomes beneficial to both companies because Wanna Widget has a well established transportation network and is able to transport the products at a lower cost. Therefore, Wawadoo can drop the price of its widgets to Wanna Widget. Wanna Widget can lower its expense and sell widgets for lower because they can buy the product at a lower price and transport it for cheaper than Wawadoo could.

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Due Diligence

See Also:
Due Diligence on Lenders
Auditor
Mergers and Acquisitions (M&A)
Audit Committee
Loan Agreement

Due Diligence Definition

The Due Diligence definition is an extensive qualitative and quantitative look at a company. It helps company leaders make the best informed business decision about a company. Furthermore, Due Diligence is often associated with audits, where it is required before a public offering. In addition, it is associated with mergers and acquisitions to reduce the risk in the market for these activities.

Due Diligence Meaning

Due Diligence often becomes necessary when a large transaction is about to take place like a merger or loan agreement, or when the company’s financials are going to be presented to the public. Oftentimes, due diligence requires the assessment to be both qualitatively as well as quantitatively.

Qualitative Due Diligence

A qualitative act of due diligence may be to assess the mental state and capability of the management. This can be done through the following:

Quantitative Due Diligence

In comparison, quantitative due diligence includes thorough investigations of the books and records. This can range from asset appraisals to day to day transactions. A thorough understanding of internal controls and its effectiveness also become necessary to ensure the risk for the business is as low as possible.

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Credit Memorandum Definition

See Also:
Debit Memorandum (memo)
Credit Sales
Account Reconciliation
Chart of Accounts (COA)
Transaction Exposure
General Ledger Reconciliation and Analysis
Debt Compliance 101: Keeping Your Banker Happy

Credit Memorandum Definition

The credit memorandum definition or memo is a form or document, sometimes called a credit memo invoice, that informs a buyer that the seller will be decreasing or crediting the amount that the buyer owes in accounts payable, thus decreasing the amount of accounts receivable in the seller’s account.

Credit Memorandum Meaning

A credit memo is often issued when a seller has made some sort of mistake, or extenuating circumstances have been brought to light which require an adjustment towards a sale. Credit memos from a bank are usually in regard that a bank if reversing some sort of transaction in which the bank made a payment it should not have, or the bank may have made a collection upon a note receivable or a certificate of deposit. When the latter occurs the bank will transfer the collection of funds into the depositor’s account.

Credit Memorandum Example

For example, Cindy works for Fluffy Stuffs Inc. as a part of its sales staff. The company has recently sent an order to Toys N’ More for a price based upon last month’s prices. Cindy just received the new prices the sales staff is supposed to charge customers. These prices are much lower than the past due to a drop in the market price for stuffing. Therefore Cindy sends a credit memo form to Toys N’ More informing them that they should reduce the amount that they owe to Fluffy Stuffs. Fluffy Stuffs will also reduce its accounts receivable by the same amount.

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Buyer Bargaining Power (one of Porter’s Five Forces)

See also:
Porter’s Five Forces of Competition
Threat of New Entrants
Intensity of Rivalry
Threat of Substitutes
Supplier Power
Supplier Power Analysis

Buyer Power Definition

Porter’s Five Forces of buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. When analyzing the bargaining power of buyers, conduct the industry analysis from the perspective of the seller. According to Porter’s 5 forces industry analysis framework, buyer power is one of the forces that shape the competitive structure of an industry.

(See the other Porter’s 5 forces of competition.)

The idea is that the bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability. Strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease profit potential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price, makes an industry less competitive and increases profit potential for the seller. The concept of buyer power Porter created has had a lasting effect in market theory.

Conducting an industry analysis can be overwhelming and confusing. Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market. 

Buyer Power – Determining Factors

Several factors determine Porter’s Five Forces buyer bargaining power. If buyers are more concentrated than sellers – if there are few buyers and many sellers – then buyer power is high. Whereas, if switching costs – the cost of switching from one seller’s product to another seller’s product – are low, the bargain power of buyers is high. If buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high. If the consumer is price sensitive and well-educated about the product, then buyer power is high. Then if the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high. If substitute products are available on the market, buyer power is high.

And of course, if the opposite is true for any of these factors, buyer bargaining power is low. For example, low buyer concentration, high switching costs, no threat of backward integration, less price sensitivity, uneducated consumers, consumers that purchase specialized products, and the absence of substitute products all indicate that buyer power is low.

Buyer Power – Analysis

When analyzing a given industry, all of the aforementioned factors regarding Porter’s 5 Forces buyers power may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high buyer bargaining power and some may indicate low buyer bargaining power. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

Buyer Power is High/Strong if:

• Buyers are more concentrated than sellers

• Buyer switching costs are low

• Threat of backward integration is high

• Buyer is price sensitive

• Buyer is well-educated regarding the product

• Undifferentiated product

• Buyer purchases product in high volume

Substitutes are available

• Buyer purchases comprise large portion of seller sales

Buyer Power is Low/Weak if:

• Buyers are less concentrated than sellers

• Buyer switching costs are high

• Threat of backward integration is low

• Buyer is not price sensitive

• Buyer is uneducated regarding the product

• Highly differentiated product

• Buyer purchases product in low volume

• Substitutes are unavailable

• Buyer purchases comprise small portion of seller sales

Buyer Bargaining Power Interpretation

When conducting Porter’s 5 forces buyer power industry analysis, low buyer bargaining power makes an industry more attractive and increases profit potential for the seller, while high buyer bargaining power makes an industry less attractive and decreases profit potential for the seller. Buyer power is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Many respect the buyer power Porter’s five forces.

Start preparing your external analysis so you can react in realtime when the buyer’s have bargaining power over your company. Don’t loose out because of an external force. Download the free External Analysis whitepaper by clicking here or the image below.

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