CHAPTER SEVEN : HOME TRADE

Trade is the buying and selling of goods and service with the aim of making profit

Importance of trade

  • Avails a variety of goods and service
  • Helps producers to dispose their surplus produce
  • Creates employment
  • It encourages specialization and division of labor
  • Promotes social relations and understanding in the parties involved
  • Ensures steady supply of goods and services
  • Helps one to acquire what one may not be able to produce

Classification of trade

Trade is divided into home trade and foreign trade.

Home trade is the one which is carried within a country’s boundaries while foreign trade is carried out between two or more countries.

Foreign trade may be bilateral (between two countries) or multi lateral (among many countries)

Home trade may further be classified into wholesale and retail trade

Wholesale trade

This is the buying of goods and services from producers and manufacturers in large quantities and selling them to retailers in relatively smaller quantities

The person who does this is a wholesaler

Functions of retailers

They can be discussed based on the service they render to the wholesaler, producer and consumers

Services rendered to consumers

  • Credit facilities – since retailers are in personal contact with their customers, they may give credit to the customers they trust
  • After sale services – These services include transport, installation, repair and maintenance
  • Offer advice to consumers on choice and use of products
  • Make goods available to consumers at the right time and place
  • Breaking bulk. I.e. reducing of the size quantity to a convenient requirement

 

Services rendered to wholesalers

  • Assist in distributing goods to consumers
  • Relieve the wholesaler the burden of transportation
  • Retailers relieve wholesaler the burden of storage
  • Retailers are a good source of valuable information on market which assist wholesalers in anticipating consumers demand

Services rendered to the manufacturer

  • Providing valuable information on consumer demand
  • Marketing the manufacturers products
  • Advertise goods on behalf of the manufacturer

 

RETAIL TRADE

Retailers can either be small scale or large scale retailers

Small scale retailers

  • They form majority of the retail traders
  • They are found in most parts of the country
  • In most cases they are operated as one-man business
  • They are easy to start because they require little capital

Classification of small scale retailers

Classified into two main groups i.e.

  • Small scale retailers without shops
  • Small scale retailers with shops

SMALL SCALE RETAILERS WITHOUT SHOPS

Itinerant traders

  • They carry goods about with them on bicycles, motor-cycles or on their heads.
  • They move from town to town, village to village and from door to door selling their goods
  • They can sell clothes, plates, cups, vegetable etc
  • They are persuasive and as a results customers sometimes buy goods they do not need
  • Examples of itinerant traders are hawkers and peddlers
  • Hawkers use bicycles or motorcycles but peddlers walk around

Characteristics of hawkers and peddlers

  • Are found mostly in densely populated regions
  • Move from one shopping center to another, village to another and door to door in search of customers
  • They are persuasive
  • Their prices are not controlled

Advantages of itinerant traders

  • Flexible in that they move from one place to another
  • Require little capital to start and operate their business
  • Convenient in that they take goods to the customer
  • Don’t suffer bad debt because they sell in cash
  • Few legal formalities required

Disadvantages

  • Affected by weather changes because they operate in open air environment
  • Difficult to transport business wares to various places
  • Do not offer guarantee, in case the items are found defective

Roadside sellers

  • Hey sell goods at places where other people pass such as in busy roadsides, streets, bus stages, road junctions and entrance to schools and public buildings
  • They deal with fast moving goods like sweets, roasted maize and fruits
  • Place their goods on trays, card boards, empty sacks or mats

Open air market traders

  • Found in convenient places which are normally centrally located, where people meet to buy and sell goods.
  • Traders pay entrance fee to be allowed to bring in goods
  • Market is under the administration of the local authorities
  • They are open on particular days of the week

Automatic vending machines

  • These are coin operated depending on what you want to buy
  • They are used for selling commodities like cigarette, drinks and stamps.
  • Juke boxes and telephone coin boxes are also vending machines where you buy services

SMALL SCALE RETAILERS WITH SHOPS

Single shops (unit shops)

  • They have fixed premises
  • They are usually run by one person who gets assistance from his family or employed attendant
  • Some specialize in one line of commodities such as clothes, groceries etc

Tied shops

  • They sell exclusively the products of one particular manufacturer
  • They are owned and controlled by the manufacturer who designs the shop and its appearance, e.g in painting.
  • The manufacturer offers goods on credit to the trader
  • g. Bata Shops, Petrol stations like Shell, Kenol

Kiosks

  • Usually small shops or simple structures which sell fast-moving goods like newspapers, sweets and soft drinks
  • Located in strategic places like corners of busy street roads, residential areas

Market stalls

  • These are permanent stands found in market
  • They are open daily
  • Constructed and owned by the local authorities
  • Each stall deals with a particular good or service
  • They are rented or leased by individuals from the local authority
  • Examples Kariokor and City Markets in Nairobi.

Canteens

  • These are retail shops found in institutions such as schools, colleges, hospitals and army barracks.
  • They sell goods mainly to the people working in the institution
  • They may be run by the institutions management or by individuals on rental basis
  • Can offer tea, sodas, sugar and other foodstuffs

Mobile shops

  • They move from village to village town to town selling their goods.
  • They have a converted van, lorry or bus arranged as a shop from which customers can buy their goods

Advantages of small scale retailers

  • Its easy to raise capital to start the business
  • Retailer is in close contact with consumers and may give credit to credit worthy customers
  • The risks involved in the business is small
  • The business is simple to operate and manage
  • Few legal formalities required
  • Trader can easily change from one product to another

Disadvantages

  • Trader has limited access to loan facilities
  • They do not hire specialist or technical staff
  • May suffer bad debt
  • They do not enjoy economies of scale
  • They have a low turnover because of the little capital invested

 

LARGE SCALE RETAILERS

  • They normally operate in urban areas
  • May occupy a single big building or several premises scattered in various areas of the same town or different towns
  • They require large amount of capital to start
  • They buy goods from wholesalers and manufacturers in large quantities
  • They are allowed trade discounts and other favorable credit facilities
  • The services of specialist like salesmen, storekeepers, accountants and managers are required
  • Management is centralized, stock purchases are made at the head office
  • Branches are required to submit monthly returns to the headquarters

Types of large scale retailers

  • Supermarkets
  • It’s a large self-selection store that deals mainly with house hold goods such as utensils, foodstuffs and clothes
  • Goods are well displayed on shelves and eac article carries a price tag.
  • The buyer walks around picking the goods one wants to buy and placing them in a trolley or a basket.
  • The goods are paid to one of the cashier stationed near the exit

Features of supermarkets

  • Require large capital to start
  • Stocks variety of goods
  • Offer self service facilities
  • Goods have price tags on them
  • Prices of goods are fixed
  • No credit facilities offered
  • Sell comparatively low prices

Advantages of supermarkets

  • They buy goods in large quantities which enable them to obtain good trade discount. They are therefore able to offer lower prices
  • Customers get all the goods they want under one roof. This saves time
  • Supermarkets employ few attendants therefore reducing their monthly wage bill
  • Impulse buying leads to more sales because customers have access to the goods which they pick from the well displayed shelves
  • They don’t sell on credit thereby avoiding bad debts

 

Disadvantages

  • They don’t offer credit facilities to the customer
  • They don’t deliver goods to customers premises
  • They don’t give personal services to the customers
  • They incur many losses due to pilferage of goods
  • Impulse buying leads the customer to buy goods they may not want

Chain stores (multiple stores)

  • Chain stores are large scale businesses with separate branches which are managed and organized centrally. The branch managers are accountable to the head office
  • g. the Deacons and African Retail Traders (ART)
  • They have standard prices for their products no matter where the branches are located
  • They have similar shop fronts appearance and displays.

Characteristics of chain stores

  • Purchases are centralized
  • Standard prices for all products in all their branches
  • Sales are centralized
  • All branches deal in same type of product
  • They are uniform in outward appearance and interior layout

Advantages of chain stores

  • They buy goods in large scales which enables them to obtain good trade discounts.
  • The cost of running a chain store is controlled and managed at the head office. The headquarters advertises on behalf of the branches
  • Slow-moving goods in one branch cab be transferred to another branch where demand for them is higher
  • The identical sold by chain stores and the similar shop fronts and window displays publicize the business
  • Chan stores serve a wider market because they are spread all over the country
  • Goods are sold on cash basis, hence reducing the cost of managing bad debts

Disadvantages of chain stores

  • Large amount of capital are required to run a chain store
  • People tend to shy away from buying identical products such as clothes
  • Chain stores do not offer credit facilities, except those operating exclusively on hire purchase scheme
  • Lack of personal touch with customers

Departmental stores

  • Comprises many single shops under one roof and one management.
  • Each department deals in a different line of goods and is controlled by a departmental manager
  • Departmental manager is responsible for buying in his department although this may be centralized
  • They are located in town centers
  • In Kenya we have no departmental store

Advantages of departmental stores

  • Customers can buy a wide variety of commodities from different shops under one roof
  • Departmental stores buy goods in large quantities at lower prices and hence these goods are sold at lower prices
  • Generally open for long hours
  • Offer adequate parking facilities to customers
  • The store is able to employ qualified staff thus providing high quality services

Characteristics of departmental stores

  • They offer a wide variety of goods at lower prices
  • They are attractive and convenient to shop in
  • They are usually situated in town centers
  • They provide services such as restaurants, reading rooms and post office to attract customers
  • Each department is managed by departmental manager dealing in a different line of goods

Disadvantages of departmental stores

  • Large amount of capital is required to run the store
  • A departmental store may run one department at loss to attract customers to other profit making departments
  • Carter mainly for the urban communities in which they are located
  • Lack personal contact with their customers
  • Their big sizes posses management problems related to coordination and control of the activities on the different departments
  • Hypermarkets
  • It’s a large shopping centre in one building comprising a variety of business under one roof and managed by different people.
  • They are located away from the city centre and have good access roads and ample parking
  • g. in Kenya is the Sarit Centre in Nairobi’s Westlands

Characteristics of hypermarkets

  • Good access roads
  • Ample parking space
  • Many business in one building
  • Attractive and convenient to shop in
  • Located in the outskirts of town
  • Offer a variety of goods and services

Advantages of hypermarkets

  • Offer extensive parking for customers
  • Customers can do all their shopping in one building , especially those who buy their monthly supplies in bulk
  • They save on space, which reduces rents and rates
  • Usually open for long hours
  • They provide credit facilities by accepting credit cards

 

Disadvantages of hypermarkets

  • Since they are located away from the city centers, they serve only a limited number of people especially those with cars
  • Require a large space which is not available in the Central Business District (CBD)
  • Their prices are not controlled and therefore subject to bargaining

Mail order stores

  • It’s a type of retail trade where business is carried out through the post office.
  • The customers place their order for goods through the post office and the goods are also supplied through the same
  • Buyers get information from advertisements in print media, journals, radios.
  • The goods are dispatched mostly on the basis of cash with order (C.W.O) or Cash on delivery (C.O.D)

Characteristics of mail order stores

  • They sell goods through the post office
  • They advertise through the print media, roads, journals, cinemas etc.
  • All transactions are passed through the post office
  • Customers do not visit the selling premises
  • Goods are dispatched, mostly on the basis of cash with order or cash on delivery

Advantages of mail order stores

  • It reaches customers who are far away from the shopping centers
  • Does not require transport facilities
  • Total control of distribution is possible
  • Does not require the services of salesmen

Disadvantages of mail order stores

  • High cost of advertising increases the price of the goods
  • Inspection of goods by the customer is not possible
  • The variety of the goods that can be sold is limited
  • Personal contact between the buyer and seller is not possible
  • Suitable to those who can read and write
  • Problems arising in the post office may affect the business, for example strikes

WHOLESALE TRADE

  • It involves selling goods in large quantities to traders for resale.
  • Wholesalers are classified according to the range of products they handle, the geographical area in which they operate and method of operation

According to the range of goods they handle

  • General merchandise wholesalers
  • General line wholesalers
  • Specialized wholesalers

According to the geographical area in which they operate

  • Nationwide wholesalers
  • Regional wholesalers

Their method of operation

  • Cash and carry wholesalers
  • Mobile wholesaler

General merchandise wholesalers

  • They deal in a wide range of products. The lines of products they deal in are distinct, e.g hardware, clothing, foodstuffs and chemicals

General line wholesalers

  • Deal with a wide range of products, but within one line, eg. Hardware

Specialized wholesaler

  • Deal in particular goods from a given line of products, e.g the line of foodstuffs

Nationwide wholesalers

  • Distribute goods all over the country.
  • They establish warehouses or depots in different areas from which they supply the goods to their customers

Regional wholesalers

  • Offer their products to certain parts of the country only.
  • They may cover a location or a district

 

 Cash and carry wholesaler

  • Operate on self service basis like a supermarket
  • Traders come and pick goods and pay cash for them
  • They don’t offer transport facilities to their customers
  • No credit facilities are offered

Mobile wholesalers

  • Use vehicles to go around selling goods to traders

Rack jobbers

  • Specialize in selling particular products to their specialized wholesalers

Alternative classification of wholesalers

  • Those who buy goods, store them in warehouses and sell them to traders without having added anything to them
  • Those who, after buying the goods and storing them, prepare them for sale. They may break bulk, pack, brand, grade
  • Wholesalers who organize the distribution of goods, but who do not themselves physically handle the goods. This is normally the case with goods such a motor cars
  • Who act as wholesalers’ agents or brokers. These are middle men who are paid a commission for their work

Definition of terms used in whole sale trade

Breaking bulk

It is reducing the size quantity to a convenient requirement, eg buying in cartons from producers and selling them in packages to retailers

Packing

Putting goods in packets and boxes

Branding

Giving a product a name by which it will be sold.

Sorting

Selecting goods in desired sizes, weights, colors and qualities

Grading

Putting goods in groups of similar qualities to make it easier to price them

 

Blending

This involves mixing different grades to achieve desired tastes, color and other qualities

Services of wholesalers to the producer

  • Act as link between the producer and the retailers
  • Relieve producers of some of the risks they would experience which include a fall in price due to fall in demand
  • The producer is saved the problem of storage.
  • They carry out market research that is important to the producers
  • Transport, break bulk, pack, brand, sort, grade and blend goods
  • Engage in product promotion through advertising, shows, displays, films, exhibitions and trade fairs.

Services of wholesalers to retailers

  • Wholesalers ensure that goods are available at convenient locations for the retailers. This save transport cost
  • They break bulk for the benefit of the retailers
  • Offer transport facilities to retailers, therefore reducing the operating cost
  • Offer advisory services to retailers, with regard to market trends
  • Offer credit facilities
  • Engage in sales promotion, hence retailers are saved the problem of having to do so
  • They grade, sort, blend, pack and brand goods and save retailers the cost of performing those functions

Services of wholesalers to consumers

  • Ensure steady supply of goods to retailers which ensures that consumers are not faced with shortage
  • Ensures stable supply of goods to the market which ensures steady prices
  • Make it possible for consumers to enjoy a variety of goods
  • Break the bulk thereby ensuring consumers get the goods in desired quantities
  • Give information to consumers through retailers about goods, e.g. new products or change in products

 

 

DOCUMENTS USED IN HOME TRADE

These are documents that are used to show that a business transaction has taken place Letter of inquiry

  • Is a request by a possible buyer for information about the goods sold by a seller.
  • Inquiries can be oral or written
  • A written inquiry is called a letter of inquiry.
  • Seller may reply to a letter of inquiry by sending either a catalogue, quotation or price list

Catalogue

  • This is a booklet which briefly describes the goods a seller stocks.
  • Sent when a buyer send a general letter of inquiry

Its contents are

  • After sale services offered by the seller
  • Packaging and posting expenses to be incurred
  • Delivery services to be used
  • Terms of sale

Quotation

  • Sent when an inquiry is specific in nature.
  • Shows the terms of sale, prices of the commodities and description of the goods to be supplied

Price list

  • It’s a list of items sold by trader together with their prices
  • Information is usually brief and not illustrated
  • Cheaper to print than catalogues

Local Purchase Order

Send by the buyer after receiving either a catalogue, quotation or price list

Order can be done verbally, or written in form of filing letters

Contents are

  • Names and addresses of the buyer and seller
  • The number of the order
  • Quantities ordered and total amount to be paid
  • Description of the goods ordered
  • Price per item
  • Special instructions on such matters as packaging and delivery

Acknowledgement note

Is a document sent by the seller to the prospective buyer informing them that their order has been received and that it is being acted upon.

Packing note

  • It’s a document that is send with the goods that have been dispatched to the buyer
  • It used to make a spot check on the goods to ensure that the goods packed are the goods ordered

Contents

  • Quantities of the goods packed
  • A brief description of the goods
  • The means of delivery

Advice note

  • Its used to inform the buyer that the goods have been dispatched by the seller

Contains the following

  • The means of delivery
  • A description of the goods

Functions of the advice note

  • Informing the buyer that the goods are on the way so that in case of any delays in delivery, the buyer can always make inquiries
  • Alerting the buyer so that the necessary arrangements can be made for payments when the goods arrive

Delivery note

  • It is sent along the goods to delivered
  • It is made in triplicate
  • One copy of the note is left with seller and the remaining two copies are sent with the goods to the buyer
  • When goods reach the buyer, one checks them against the delivery note
  • If the buyer is satisfied with the goods, they sign both copies of the delivery note, keep the original and the other copy is send to seller

Contents of delivery note

  • Names and addresses of seller and the buyer
  • Date of delivery
  • Delivery note number
  • Description of goods and quantities
  • Space for the buyer of the goods to sign and comment on the condition of the goods received

Consignment note

If the seller doesn’t have transport services, they may hire the services of a transporting company to deliver the goods on their behalf. The transporter issues a consignment note to the seller

Contents

  • Details of the goods to be transported
  • Name and addresses of the seller (consignor) and buyer (consignee)
  • Terms of carriages and conditions of transporting the goods
  • After the seller completes the consignment note, it is returned to the carrier who takes it with the goods to the buyer. The buyer signs the note upon delivery of the goods

Invoice

  • Sent by the seller to the buyer demanding payment for goods delivered.
  • There are two types of invoices; cash invoices and credit invoice
  • A cash invoice is paid across the counter, thus acting as a cash sale receipt
  • Credit invoice is issued when the buyer is allowed to pay at a later date

Functions of an invoice

  • Shows details of goods sold
  • It’s a request to the buyer to make a payment
  • Used as a source document in recording the transactions in the books of accounts

The letters E & OE (errors and omissions excepted) are printed at the bottom of an invoice

They mean that the seller reserves the right to correct any errors and omissions made in the invoice

Pro-forma invoices

Functions

  • It serves as a polite request for payment before the goods are sent to the buyer
  • Sent when the seller does not want to give credit to the buyer
  • Issued to an agent who sells goods on behalf of the seller
  • Used by importers to get customs clearance before the goods are sent
  • Can serve the same purpose as the quotation. A pro-forma invoice is used in both home and foreign trade

Damaged goods notes/returned goods

  • In case some of the goods are damaged, the buyer send them back to the seller together with the damaged goods note.
  • Its prepared in triplicate
  • Two copies are sent to the seller and the other is retained by the buyer
  • When the seller receives the damaged goods note they will issues a document called a credit note

Credit note

It’s a document issued to correct an overcharge/reduce the amount due from a buyer as shown in the invoice

It’s issued under the following circumstances

  • When the goods returned by the buyer because they are either damaged or they are not in accordance with the order
  • When packing cases and empty containers are returned
  • There is an overcharge in the invoice as a result of arithmetical error

It’s printed in red

Debit note

  • Normally used to make undercharge corrections to invoices that had been previously sent to the buyer

Errors that may make a debit note be issued are

  • Mistakes in calculations
  • Omissions of items in the invoice
  • Price undercharge on items

Statement of account

Incase transactions are carried out on credit, the seller send a document containing all the transactions between the buyer and the seller.

It normally contains information derived for a specific period of time, such as a month, form the following:-

  • All invoices
  • All credit notes
  • A debit notes
  • All receipts

Contains

  • Names and addresses of the buyer and the seller
  • Account number
  • Date column
  • Particulars or details column
  • Money column with debit, credit and running balance column
  • Terms of credit

Receipt

A receipt is a proof of payment.

Contains

  • Date of payment
  • Name of the person making payment
  • Amount paid in words and figures and means of payment
  • Name of the institution or person to whom payment is made
  • Revenue stamp if the amount is above a set minimum
  • Receipt number

IOU (I Owe You)

It’s a written acknowledgment of a debt

Written by the debtor and does not specify the date when settlement will be made

Means of Payment

  • Refers to form or manner in which payment is made for goods and services.

Cash

Payment made using bank coins or notes

Advantages of cash payment

  • It’s the only means with legal tender (recognized by the law)
  • Convenient for small debts
  • Convenient to people with or without bank accounts

Disadvantages

  • Not convenient for large amount
  • Can be stolen
  • May be difficult to proof unless receipt is produced

Circumstances of cash payment

  • Amount involved is small
  • Payees doesn’t accept other means
  • Cash only means available
  • Cash needed urgently
  • Avoiding expenses

Cheques

Written order by account holder with the bank to pay a specified amount of money to the bearer

  • Drawer – The person who writes the cheque
  • Payee- Person to be paid
  • Drawee – The bank

Open and crossed cheque

Open cheque – one that can be cashed over the counter

Crossed cheque – can only be deposited in an account

A cheques is crossed by drawing two parallel lines. The crossing can be general or specific

General – contains only the parallel lines

Special – as other instructions

 

Dishonored cheque

A cheque is dishonored when the bank refuses to pay – bounced cheque

Circumstances

  • Insufficient funds
  • Signature differing
  • Post dated cheque
  • Stale cheque – presented six months after issue
  • Drawer closed account with the bank
  • Death, insanity or bankruptcy of the drawer
  • Alterations in the cheque

Advantages of cheque

  • More secure than notes
  • Convenient to carry
  • Reduces traveling
  • Used for future reference
  • Negotiable – can pay third party

Disadvantages

  • Requires payee to go to the bank
  • May be dishonored
  • Only issued by account holder
  • People refuse personal cheques

Circumstances for use of cheques

  • Amount involved is large
  • If the organization policy demand so
  • If cheques is the only means of payment
  • Avoid risks

Bill of exchange

It’s an unconditional order in writing addressed by one person to another requiring the person to whom it is addressed to pay on demand

Terms

  • It’s a command not a request
  • Its unconditional
  • Bill must be written
  • Amount be clearly stated
  • Payee should be named
  • Date of payment be stated

Advantages

  • Rights may be passed to another person
  • Date of payment is determined
  • Acceptance by debtor makes it legally binding
  • May be discounted

Disadvantages

  • May be dishonoured on maturity
  • Cash may not be ready
  • Expensive
  • Circumstances for use of bill of exchange
  • Creditor wants to be assured of payment
  • When the creditor wants money and the debtor is unable to raise
  • Creditor wants to use the debt to pay another debt

Promissory note

A document whereby a person promises to pay another a specified sum of money at a stated date

Money order

Sold by the post office, sender applies and fills an application form

The information in the money order includes

  • Amount to be remitted
  • Name of the person the money is to be paid to
  • Name of post office to be cashed
  • Name and address of the sender

Sender gives the form, money to send and commission over the counter

The payee has to

  • Identify himself
  • Identify person who send the money

The sender is left with a counterfoil as evidence to claim later

Postal order

Sold by the post office and is fixed in denominations of 5,10,20,50,100

Additional stamps worth in shilling are also needed

Circumstances

  • Small amount involved
  • Only means available
  • Avid risks

Postage stamps

Used to pay small amounts of money

Premium bonds

Issued by post office in denominations of 10 and 20 and matures at a given period

Used to settle debts but unsafe coz they can be cashed by anybody

Bankers cheque (bank draft)

Cheques drawn on a bank. One fills an application form and hands it over the bank together with the money

A cheque is prepared and is given to the applicant

Circumstances

  • Large amount is involved
  • Payee wants guarantee of payment

 

 TERMS OF PAYMENT

Refers to an arrangement between the buyer and the seller on how the buyer should settle debts arising out of transactions between him and the seller

Cash

Paying immediately

May be cash on delivery or cash with order

C.O.D (Cash On Delivery) – Goods paid for when delivered

C.W.O (cash With Order) –Payment made at the time of placing order

Benefits of cod/cwo

  • Reduces risk of bad debt
  • Working capital readily available
  • Few records
  • No time wasted

Circumstances

  • Buyer new to the seller
  • Buyer credit worthiness is in doubt
  • Mail order business
  • Policy demand so

Deferred payments

Goods and services not paid in full on delivery. Instead paid in future either in lump sum or several installments

Open trade credit

  • Goods sold on credit such that the buyer pays for them in future in installments
  • The seller should however ensure that the buyer would pay by
  • Ascertaining the credit worthiness
  • Asking buyer to guarantee payment
  • Asking buyer to have someone to guarantee payment
  • Asking for security

 

 Factors to consider when giving credit

  • Credit worthiness of the buyer
  • Repayment period
  • Amount of goods
  • Availability of stock
  • Reliability
  • Frequency of buying
  • Intention to attract and maintain customers

Cash discount – discount allowed to a buyer on order to encourage him/her to pay quickly

Examples of open trade credit

  • Simple credit – short time not more than a week
  • Monthly credit – monthly basis
  • Budget accounts – regular deposit

Regular payment

Maximum credit to be allowed

Charge for any special offer

  • Trade credit – goods bought for resale
  • Credit card facilities – enables one to obtain goods from suppliers as long as they accept cards examples Barclays card, American Express, Access cards and visa cards

Advantages of credit card

  • Enables one to get goods without paying
  • Convenient to carry around
  • Enalbles holder to get money from specified banks
  • Increases credit rating of individual
  • Safe to carry than cash
  • Some cards are internationally accepted

Disadvantages

  • To acquire the card one must have established credit record
  • High card interest rate
  • Prone to abuse through fraud
  • Interest charged in case of delay in payment
  • Minimum age of 18 years to get card
  • Overspending
  • Limited to specific areas
  • Faces competition from other means
  • Few business accept cards
  • Long procedures to get the cards
  • People of high income only can afford

Hire purchase

  • A method of hiring property with an option to buy
  • A buyer ays initial deposit and the rest of the amount is spread over an agreed period of time
  • Ownership remains with the seller until final installment is paid
  • The buyer cannot sell the commodity until last installment
  • A certificate of completion is issued once final installment is paid as proof of transfer of ownership

Advantages to the buyer

  • acquisition and use of goods immediately after entering into contract
  • Pre-determined installments
  • Buyer can poses expensive goods

Disadvantages to buyer

  • Goods belong to the seller until last installment
  • Buyer may be tempted to buy more that he can pay
  • Expensive than cash
  • Limited type of goods

Advantages to seller

  • Able to increase volume of sales
  • Profit earned is higher
  • Goods belong to seller until last installment

Disadvantages to seller

  • Operating cost is high
  • Reposed goods only sold as second hand
  • Risks of loss is high
  • Large amount of capital required

 

Installment buying/credit purchase

Similar to hire purchase except that ownership of the commodity passes to the buyer immediately down payment is made

Hire purchase Credit purchase
·         Buyer does not become owner immediately ·         Buyer becomes owner immediately
·         Buyer cannot resale product ·         Buyer can resale goods
·         Prices higher ·         Price is lower
·         Goods can only be reposed ·         Can be repossessed and be sued (taken to court)

Other terms

  • discounts- allowance by the seller such that the buyer pays less than the marked price
  • quantity discount – Allowance to encourage bulk buying
  • trade discount – discount allowed by a trader to another so that the buyer can make profit after selling
  • cash discount – allowance by a trader to his credit customers to encourage them to pay debts promptly

Circumstances for deferred payment

  • Credit worthiness of customer is unquestionable
  • Attract and retain customers
  • Increase sales
  • Dispose off slow stock

Standing order

Instruction by an account holder to his/her bank authorizing it to make regular payments of specified amounts to a specific person till order is cancelled

 

 



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