This lesson is for a merchandiser, a factory owner, or a finance clerk who needs to know not just how much an order is worth, but when that value actually becomes cash the factory can spend. At work, a factory reads a costing sheet and sees one number: the FOB price. That number tells the factory how much money the order is worth. It does not tell the factory when that money arrives in its bank account, and the gap between finishing the goods and being paid is a real cost, separate from the price itself.
Delta Garments currently runs two orders side by side. One is Order A, its regular export order for Northline Apparel, paid by letter of credit at shipment. The other is a domestic order of the same value for Cedar & Co., paid on 60-day open account. Without this skill, a merchandiser looking only at price would treat these two orders as equally good for the factory's cash position. They are not. This lesson teaches you to read payment terms as carefully as you read price, and to work out how long an order actually ties up a factory's cash.
You need: the idea of a costing sheet's total price from lesson 7.2. You do not need to know how interest or bank finance is calculated.
By the end of this lesson you can:
Not covered here: how the FOB price itself is built (lesson 7.2), how margin and markup are calculated (lesson 7.3), and where profit across the whole chain is made or lost (lesson 7.5).
| Term | Meaning |
|---|---|
| Payment terms | The part of a purchase order stating when and how the factory is paid, for example letter of credit at shipment or open account. |
| Letter of credit | A bank promise to pay the factory once the shipping documents match the order. |
| Open account | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Deposit | A partial payment made before an order is finished. The rest, the balance, is usually paid on shipment. |
| Cash on delivery | Payment made at or very near the moment the goods are physically delivered to the buyer. |
| Cash flow | The movement of money into and out of a business over time, separate from how much an order is worth on paper. |
| Cash-flow gap | The length of time between a factory finishing production and actually receiving payment for that production. |
| Working capital | The money a business needs on hand to keep operating — paying workers and suppliers — while it waits to be paid for goods already made. |
Every costing sheet ends in one number: the FOB price, what the buyer pays the factory per piece. That price answers only one question — how much. It does not answer a second, equally important question — when. Payment terms answer that second question. They fix the point in the order's life at which the buyer's money is due, and therefore the length of time between the factory finishing the goods and the factory actually holding the payment. That gap is a real cash-flow cost a factory must plan for, on top of, and separate from, the price itself.
A factory rarely meets only one payment term across its customers. The term itself, not the price, decides how long the factory's money is tied up.
| What can differ | The shapes you will meet | Why it matters |
|---|---|---|
| Trigger point of payment | Letter of credit at shipment: the buyer's bank pays once shipping documents match the order, at or shortly after the goods leave the factory. | Money arrives close to the point of shipment; the wait is close to the production timeline itself. |
| Delay after delivery | Open account: the factory ships or delivers first and waits an agreed number of days, commonly 30, 60 or 90, before payment. | Each extra day of waiting is a day the factory's cash from this order stays unavailable. |
| Payment split across the order | Deposit plus balance: part of the price is paid before production starts, the rest on shipment. | Reduces the factory's cash-flow exposure compared with the full price arriving only at shipment. |
| Timing relative to physical delivery | Cash on delivery: payment happens at or very near the moment the goods physically reach the buyer. | The shortest cash-flow gap of the common terms, but least common for export orders that cross a border. |
None of these terms is wrong. A new brand with little history may only be trusted with cash on delivery; an established buyer with a long relationship may be extended 60 or 90 days open account. What a merchandiser must never do is assume a term from the price alone; the payment terms are written in the purchase order and must be read on their own.
The case we followDelta Garments currently makes two orders of similar total value at the same time. The first is Order A, its export order for Northline Apparel: 15,000 basic cotton T-shirts at a FOB price of USD 3.20 each, paid by letter of credit at shipment. The second is a domestic order, of equivalent value, for Cedar & Co., the local brand that buys from Delta Garments on a fixed 60-day open account. Cedar & Co.'s order is the one this lesson follows in detail, because it is the shape that most clearly shows a cash-flow gap that price alone would hide: the same size of order as Order A, but with 60 extra days of waiting built into its payment terms.
| Order | Buyer | Order value (equivalent) | Payment terms | Cash arrives |
|---|---|---|---|---|
| Order A | Northline Apparel (export) | USD 48,000 | Letter of credit at shipment | At or shortly after shipment |
| Domestic order | Cedar & Co. | USD 48,000 (equivalent value) | 60-day open account | 60 days after delivery |
Both orders show the same price on their costing sheets. Only the payment terms tell Delta Garments which one keeps its cash tied up longer.
The worked numberOrder A's own order value is the amount at stake: 15,000 pieces at USD 3.20 each.
Order A's production period, from Order A's own timeline, runs from approvals through inspection and documents, before the goods ship: 2 weeks of approvals, 5 weeks of fabric, 2 weeks of sewing, and 1 week of inspection, packing and documents.
Ten weeks is 70 days.
Under a letter of credit paid at shipment, Delta Garments' USD 48,000 is tied up for close to this 70-day production period only; payment follows shipment closely. Under a 60-day open account on an equivalent-value domestic order, the same USD 48,000-scale amount is tied up for the 70-day production period plus a further 60 days after delivery.
A common mistake is assuming a higher FOB price always means better cash flow for a factory. A high-priced order paid on 90-day open account can tie up more cash for longer than a lower-priced order paid by letter of credit at shipment. Price and payment timing are two separate variables, and a merchandiser must check both, never one instead of the other. What it costs to get this wrong is real: a factory that plans its cash only from price can be short of working capital exactly when it needs to pay its own suppliers and workers for the next order.
A costing sheet's price tells a factory how much money an order is worth. It does not tell the factory when that money arrives — the payment terms do that. A letter of credit paid at shipment brings the money in close to when the goods leave. A 60-day open account makes the factory wait a further two months after delivery before the same money arrives. A deposit paid before production, or cash paid on delivery, changes the wait again. Two orders can be worth exactly the same money and still tie up a factory's cash for very different lengths of time. A higher price is not automatically better if the wait for payment is much longer. Always check the price and the payment terms together, never the price alone.
Delta Garments has room for one more order this season, and two offers have come in of similar total value. The first order carries a slightly higher FOB price and is paid on 45-day open account. The second carries a slightly lower FOB price and is paid by letter of credit at shipment. Karim, the production manager, is asked which order is better for Delta Garments' cash flow.
Is the higher-priced order automatically the better choice for Delta Garments' cash flow? Decide before opening the answer.
Not automatically. Two facts decide this together, not the price alone.
First, the payment terms. The higher-priced order's 45-day open account means Delta Garments waits significantly longer to be paid than the lower-priced order's letter-of-credit-at-shipment terms. Forty-five extra days of waiting is a real cash-flow cost, even though it does not appear on either costing sheet.
Second, Delta Garments' own cash position. If Delta Garments' cash is tight and it needs money soon for its next order, the lower-priced but faster-paying order could be the better choice overall, even though it earns slightly less per piece. If Delta Garments has spare cash and can comfortably wait, the higher price may still be worth taking.
Neither fact decides this alone. Price without payment terms hides the wait; payment terms without a look at Delta Garments' own cash position cannot say which order actually suits it best right now.
Using Order A's own order value as the amount at stake: USD 48,000 tied up for 70 days under a letter of credit at shipment, against the same USD 48,000-scale amount tied up for 130 days under a 60-day open account on an equivalent-value domestic order.
For comparison, Order A's own profit is a small share of that value at risk: USD 0.26 profit per piece.
The order's entire profit of USD 3,900 is far smaller than the USD 48,000 tied up while waiting to be paid. A factory whose cash is tied up for those extra 60 days may need to borrow working capital to cover the gap, which costs interest, or may be unable to take on its next order until this one is paid. This is a real cost that a costing sheet's price-only view does not capture, which is exactly why payment terms must be assessed alongside price, never instead of it.
Open the course workbook's Costing sheet. Its "Total (FOB price)" row shows Order A's fixed FOB price, USD 3.20, built from fabric, trims, making, overhead and profit. That price is only half the picture for cash planning.
Next to the total price cell, write a note on how long each payment term takes to turn that price into cash in hand. For Order A's own terms, letter of credit at shipment, cash arrives close to the 70-day production period itself. For a 60-day open account, such as Cedar & Co.'s domestic order, cash arrives about 130 days after finishing production, once the 60-day wait after delivery is added. Do this for every order: the price cell says how much; your note says when.
1. What does the FOB price on a costing sheet tell a factory, and what does it not tell it?
2. Which of Delta Garments' two payment terms in this lesson typically ties up cash longer: letter of credit at shipment, or 60-day open account?
3. A factory ships a 5,000-piece order and is paid on 90-day open account. Compared with an order of the same value paid by letter of credit at shipment, what happens to the factory's cash-flow gap?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Payment terms | شروط الدفع | Conditions de paiement | Ödeme şartları | The part of a purchase order stating when and how the factory is paid, for example letter of credit at shipment or open account. |
| Letter of credit | اعتماد مستندي | Lettre de crédit | Akreditif | A bank promise to pay the factory once the shipping documents match the order. |
| Open account | حساب مفتوح | Compte ouvert | Açık hesap | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Deposit | دفعة مقدمة | Acompte | Kapora | A partial payment made before an order is finished. Does not usually transfer ownership of the whole order by itself. |
| Cash on delivery | الدفع عند التسليم | Paiement à la livraison | Teslimatta ödeme | Payment made at or very near the moment the goods are physically delivered to the buyer. |
| Cash flow | التدفق النقدي | Trésorerie | Nakit akışı | The movement of money into and out of a business over time, separate from how much an order is worth on paper. |
| Cash-flow gap | فجوة التدفق النقدي | Écart de trésorerie | Nakit akışı açığı | The length of time between a factory finishing production and actually receiving payment for that production. |
| Working capital | رأس المال العامل | Fonds de roulement | İşletme sermayesi | The money a business needs on hand to keep operating while it waits to be paid for goods already made. |
You now separate an order's price from when that price is actually paid. The next lesson takes the whole value chain, from mill to shop, and compares where each company's profit is made, and where it is lost. Back to the course map