Transactions in international trade, or export and import, are subject to a variety of specific regulations. This regulation link to a considerable commercial value and has a significant effect on the country’s foreign exchange. As a result, import-export businesses must understand the proper payment mechanism for delivering products. The two most popular and widely utilized techniques are CIF (Cost, Insurance, and Freight) and FOB (Free on Board).
In general, there are significant distinctions between CIF and FOB. CIF or cost, insurance, and freight as the name implies to indicate that the seller will pay the shipping expenses until the conveyance carrying the products arrives at the destination. In addition, the shipping must include the seller’s responsibility to pay insurance for the items delivered. Meanwhile, FOB define as the agreed-upon condition of product transfer between the seller (exporter) and buyer (importer). FOB pricing will determined using the value of the items plus different expenses till the products come on board.
Basic Concepts of CIF (Cost, Insurance and Freight)
There are many fundamental aspects to the exporter’s duty under the CIF system. The following are some of the obligations that exporters must have in mind:
- Organizing the procedure up to the point when the cargo already loaded onto the ship.
- Managing the process of premium payment for goods insurance.
- Providing products under the terms of the contract.
- Ensure that all products are packaged under transportation regulations.
- Manage all export licenses, including security and customs issues.
Given many of the responsibilities listed above, exporters must consider preparedness when deciding whether to join the CIF system. If any of the criteria above are not fulfilled, avoid utilizing the CIF system. This system is to protect you as an exporter from a variety of damages.
Example of CIF
Company X sells coal to Company Y at the agreed-upon price. In this scenario,Company Y no longer pays insurance premiums since Cmpany X covers the expenses.
Basic Concepts of FOB (Free On Board)
To better understand this FOB system, you must first understand the fundamental principles of its implementation. This notion link to the primary responsibilities of exporters and importers.
- Exporters must deliver the products to the ship and arrange export licenses, tax payments, and a ‘clean onboard receipt’.
- Importers are responsible for the transportation contract, cargo payment, and insurance expenses.
- In the event of responsibility for loss or damage to goods, the ship’s fence is the daily limit for transferring obligation from the exporter to the importer. After the items pass through the ship’s gate, the exporter’s duty is no longer his or hers. This, however, is subject to change based on the terms of the two parties’ agreement.
- Although it is the exporter’s duty, the cost of loading the products will split with the importer if both sides agree.
Types of FOB
There are two kinds of FOB (Free on Board) in international commerce when it comes to transportation expenses. The terms are FOB Shipping Point and FOB Destination.
1. FOB Destination
FOB Destination requires the seller or exporter to bear all transportation expenses. In this arrangement, the exporter’s duty covers all hazards to the product, and this responsibility stops when the items reach the customer or importer. Another distinction is that the registration of new things happens after the product has been delivered to the customer. The buyer will not know the number of shipping expenses. Therefore it will not included in the buyer’s books.
2. FOB Shipping Point
Unlike FOB Destination, FOB Shipping Point states that the buyer or importer is responsible for all shipping expenses. In this arrangement, the importer is also responsible for any transportation hazards until the shipment reaches the warehouse. In other words, even if the products are still in route, the importer’s purchase transferred to the customer.
Please keep in mind that both kinds of FOB have advantages and disadvantages. The two types of FOB are determined by the agreements reached between the exporter and importer.
Example of FOB
Company ABC sells coal to company XYZ for Rs 500,000 per ton. This implies that business XYZ only pays Rp. 500,000 (multiplied by the number of kilograms or tons bought) and bears all transportation expenses by sea. Companies may have to pay more money to obtain the goods they request.
Differences in the Implementation of The CIF and FOB
The FOB method requires loaded products in their home country so that the condition of the commodities will determined, which has both benefits and drawbacks. Furthermore, dealing with customs papers will simplified. These customs papers are included in the exporter’s expenses. Export taxes, transit expenses from warehouse to port, production costs from dock to ship, and acquisition costs are just a few examples. In this scenario, the importer is responsible for insurance, loading and unloading expenses at the destination port, and transportation costs until the commodity are delivered to the warehouse.
Meanwhile, under CIF, the exporter must pay the cost of travel to the target country’s port, the cost of shipping and delivering the products, and the cost of insurance for the goods. This implies that the exporter bears the risk of loss and damage as well. This also means that the importer will have to pay a higher price since all of these costs are already incorporated in the price of the goods.
Importance of Insurance in Import Activities
In terms of import insurance, CIF is a factor that businesses must consider. This is because there are many potential hazards between the buyer and seller over the port. The importer no longer bears the importer benefits since the seller’s insurance expenses. Insurance is essential when it comes to importing products, for example:
1. Protection against risks
Every seaborne transportation of commodities has several potential risks. Insurance is essential for avoiding potential damage such as fire, theft, or other catastrophes.
2. Compensation for losses
If unfavourable circumstances emerge later, you may entitled to reimbursement, mainly if you purchased high-quality imported goods. As a result, insurance is one of the essential considerations.
International trade is a kind of industry that involves both exporters and importers. Of course, when it comes to international trade, there are many methods to select from. Some of these are the CIF and FOB methods described in detail in the following article. Both techniques are extensively utilized by different nations across the globe when conducting export-import transactions.
Of course, as a business owner, you must keep track of all export and import activities and transactions. Keeping track of many transactions may become challenging for exporters and importers. Consequently, there are many apps or software available to assist in the management of accounting transactions. HashMicro’s Accounting Software is one of the answers. This accounting system helps your company to minimize human errors by recording and calculating accruals and amortizations automatically.