FOB
A common term that you will hear in internet retail when you are buying products from suppliers (particularly overseas) is FOB - free on board.
So what does FOB mean? If you are ordering from a supplier in China their terms will probably state “FOB Hong Kong” - this means that they will pay to ship the products to Hong Kong and you are responsible for it from there. So in this case you would pay for shipping costs from Hong Kong.
(Side note: I learned what FOB meant the hard way - I was in Taiwan and a supplier kept using the term so being naiive I played along like I knew what they were talking about and looked it up when I got back to my hotel room that night)
There is another catch to FOB, though - it doesn’t only apply to shipping charges, but also to liability. As soon as you have received your freight (ie, are paying for the shipping) you are responsible for any losses. Your supplier isn’t going to do anything to help you out if something happens in transit and most freight companies have ridiculous rules limiting their liability (ie, if a boat sinks en route from Hong Kong you are responsible for a portion of the cost associated with recovering the remains of the boat even if your products are lost).
This has an impact on your financial records as well. If you are on an accrual method of accounting you will need to book your inventory as an asset at the FOB point (and the offsetting transfer of an asset such as cash). At the end of the month your books should account for all inventory in transit.
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Good explanation of FOB - I have to admit that when I first saw this post I thought it might be racist
Comment by Curtis — May 12, 2006 @ 7:40 am
[…] The easiest way to determine risk is the FOB terms - if you are quoting customer FOB China, you are shouldering all of the risk until the product is in the port waiting to ship - then it is your customer’s responsibility and they should be technically carrying the risk, hence you should book the revenue as soon as it ships. If the merchandise is FOB USA yet shipping from China, you should book the revenue as soon as the merchandise is in the US port. […]
Pingback by The Preston Blog - An internet marketing blog for internet retailers » When should an internet retailer book revenue? — February 21, 2007 @ 11:46 am