Share this:


TRADE IN GENERAL

Trade or trading refers to the buying and selling of goods or services for non-personal use with the aim of making profit.
It is the interchange of products between the producers and consumers at a price or consideration.
Trader: is that person who buys goods or services and sells them.
Trader: is divided into home trade and foreign trade.
– Home trade is buying and selling of goods within national boundaries, it consists of wholesale and retail trade.
– International trade is buying and selling of goods or services to overseas market between countries, it includes import, export and entrepot trade.
Characteristics of trade.
  1. Buying for resale. The aim must be buying for resale.
  2. Product: There must be goods or services to be bought and sold.
  3. More than one partly: Exchange involves at least two parties seller and buyer who are interests in a particular product to be exchanged.
  4. Profit motive: Trade aims at making profit.
  5. Price:- Trade involve distribution of good or service for a consideration and price.
  6. Possession utility: Trader allow creation of possession utility and therefore obtain effective satisfaction.
  7. Ownership utility.
  8. Series of transactions: there must be continuous buying and selling to constitute trading.
  9. Area: There should be an areas (physical or no physical) for a commodity to be transacted.
Role of trade
  1. Trade enables goods produced in a particular area to be used by the consumers in the whole country or other countries.
  2. Trade promotes social economic and political relations between nation’s peoples through trading operations conducted by traders, which can result into International peace and harmony.
  3. Trade provides employment both in public and private sector leading to social and economic welfare.
  4. Trade encourages mass production by providing ready and profitable markets for their products.
CHANNELS OF DISTRIBUTION (TRADE OR MARKETING CHANNELS)
A channel of distribution is defined as a description of the paths/routes taken by goods and rights of ownership of goods as they move from point of production to point of consumption.
It is the path linking the producer or manufacturer of a product with the consumer or user. The path which products and title follow until reach final users.
Classification of channels of distribution:
Channels may be classified according to the stages in ownership in the distributing of goods. (We will concentrate on the channels of dist
ribution for locally produced product)
  1. A one stage channel. Is where the manufacturer supplies direct to consumers. It is called direct channel of distribution.(M-C)
  2. A two stage channel: Is where the manufacturer supplies direct to the retailer who in turn supplies to consumer. (M-R-C)
  3. A three stage channel: is where the manufacturer supplies the wholesaler and the wholesaler suppliers to the retailer who in turn sells to the final consumer.(M→W→R→C)
  4. A four stage channel: is where manufacture supplies to an agent (Primary wholesaler) who supplies wholesaler (Secondary wholesaler) who supplies to retailer who in turn supplies final consumer (M-A(WI)-WZ-R-C)
Functions/Roles/advantages of a channel of distribution
  1. A well-defined and structured channel makes it possible for decisions to be made in a defined way.
  2. Pricing: Channels enable prices to be determined at each stage.
  3. Provision of general market intelligence: A free flow of information useful in the improvement of product quality.
  4. Finance of business: Trade credit offered by channel member fuel the flow of goods therefore traders are able to facilitate the flow of goods without having large operating or working capital
  5. Creation of utility: Place time and ownership or possession utility.
  6. Fill the gap in modern economic system between producers and consumers.
Activities performed in channels (By channel members)
  1. Contractual:- Buyers and sellers contact each other to facilitate flow of goods. Eg A manufacturer has to establish effective contact with the other channel members
  2. Promotion: Promotional tools are used to inform persuade and remind customers if goods are to be marketed so as to satisfy them.
  3. Merchandising: Channel member’s orders and receive goods which are demanded by their customers.
  4. Pricing: Channel members set prices that covers costs and ensure margin of profit.
  5. Transit: This is physical distribution which involves the arrangement of transport for effective flow of goods from producer to final user.
  6. Maintenance of inventories: The carrying of stock or inventive in appropriate quantities to allow swift distribution.
DESIGNING DISTRIBUTION CHANNEL
Factors to be considered when designing distribution channel:
  1. A channel designed should provide physical transfer of goods to the consumers in minimum time.
  2. A channel designed should allow appropriate communication ie. Feedback of market information to the manufacturer.
  3. A channel designed should be easily adopted relative to change in market conditions.
STEPS IN DESIGNING DISTRIBUTION CHANNEL
  1. Stating and identifying channel objectives and constraints:
→Objectives:- what should be attained by the channel must be clearly stated. E.g: to reach as many consumers as possible or to use as many dealers as possible.
→Constraints must be clearly identified in respect to:-
-product strengths and limitations
-Customers characteristics
-Company characteristics
-Middlemen characteristics
-Environment characteristics
  1. Major feasible channel alternatives must be distinguished from minor alternatives.
  2. Evaluation of alternative channels using following criteria.
a) Economic values:- Costs and returns related to various channels
b) Control requirement: Those which require effective control and those which require minimum control.
c) Flexibility of the channel especially where nature of supply of products dealt varies with time, season etc.
  1. Measuring economic return of alternative channels:
A popular method used in measuring or estimating the economic return from a channel is (ROI) –R
eturn on investment.
Formula:
ROI =RX = SX –CX
CX
Where:
RX = Return on investment associated with the channel x
SX= Estimated sales associated with the use of channel x
CX= Estimated costs associated with the use of channel x
Note other things being equal, the channel with the highest Rx will be the preferred alternative.
Other factors influencing the choice of a channel of distribution
  1. Nature of goods: A supplier chooses a certain channel which suit the nature of the goods, example Perishable and fashionable goods needs a very short channel, thus they may be sold directly to consumers, also technical and high valued goods like aircrafts may be sold directly to consumers.
  2. Market costs: if a manufacture is economic not able to meet market cost will dispose off his products
-through middlemen such as retailers and whole sellers. Example some goods require some facilities like refrigeration storage for commodities like fruits vegetable.
  1. Size and nature of the market: When the market is local (near) and large purchase direct sale is possible but if the market is scattered and small quantity purchase direct sale may not be economical.
  2. Scale of production: Producers in small quantities can sell direct
    to consumers eg: small scale farmers.
  3. Business policy: Some producers have policies which have to be adhered to Example Price control policy where producer wishes to reduce the number of middlemen to avoid increase in Price.
COMPARISON OF MAIN METHODS OF DISTRIBUTION AVAILABLE TO PRODUCER:
  1. Indirect method ( Manufacture –wholesaler-retailer)
Advantages:
a) Fewer orders dealt with resulting lower delivery and packing costs.
b) Fewer representatives needed.
c) Fewer accounts required hence reduction in bad debts.
Disadvantages
a) Lower profit margin on goods sold.
b) Producer must rely on wholesaler loyalty to promote goods. i.e no guarantee that wholesaler will promote his goods.
  1. Direct method (Producer – Consumer). Can be through mail, order business or manufacturers, own retail shops or canvassing (using own sales people), sale at manufacture’s plant.
Advantages
a) Direct control over selling method by using own sales people.
b) Saving in sales peoples salaries when using mail order.
c) Greater convenience to customer especially if customer are away from shops by using mail order business.
d) Good control over sales methods and increase in sales volume through manufacturers own shop.
e) Allows sale of technological products which need demonstration and after sales services.
Disadvantages
a) No personal contact by salesman in mail order.
b) Higher costs of transport and delivery.
c) High cost of printing catalogue for mail order business. Packing and advertising.
d) High cost of renting or purchase of sites for shops.
MIDDLEMEN OR INTERMEDIARIES IN THE DISTRIBUTION OPERATIONS
They are traders who operate between producers and final consumers as they are involved in the whole distribution process.
Are persons or firms who put producers in touch with consumer.
TYPES OF MIDDLEMEN
Middleman are classified into merchant middlemen and mercantile agents.
  1. Merchant middlemen: These are middlemen who buy and sell goods in their own name (their own properties) they include wholesalers and retailers.
  2. Mercantile agents: These are middlemen who hold and sell the goods on behalf of other people called principals. They sell goods which are not theirs they belong to principals, so they act on principal’s name.
Is appointed by the principal to act on his behalf in the ordinary courses of business including buying and selling on behalf of principal.
NOTE
Mercantile agent can be general or special agent
  • General mercantile agents: Have full authority in performing any lawful transactions on behalf of principal.
  • Special or particular mercantile agents: Perform special or particular transaction eg: Buying particular k
    ind of goods; after completion the agent ceases his agency.
The agent is required to fulfill the following conditions;
  1. Must act within his ability and he must be personally liable for his actions beyond his authority
  2. Must act on behalf of and in the name of his principal and any act done in his own name he will be liable to third parties.
  3. Must act under the instructions of the principal as may be stipulated in the contract of business operations.
DIFFERENCES BETWEEN MERCHANT MIDDLEMEN AND MERCANTILE MIDDLEMEN
EcoleBooks | COMMERCE As LEVEL(FORM FIVE) NOTES - TRADE IN GENERAL

Common features of mercantile agents
  1. They do not take title to the goods.
  2. They are paid commission based on sales or purchases
  3. They are used as marketing force by principles
  4. They serve the interest of both buyers and sellers.
Arguments in favour of middlemen.
Middleman are very important in the distribution process because.
  1. They facilitate smooth flow of goods from the manufacture to final user.
  2. They offer specialized or expert in marketing hence relieves manufactures of tasks outside their scope and concentrate in producing task.
  3. They are near customer so they know their demand and satisfied them.
  4. Many manufacturers wants to avoid risks which would face them if they had to sell directly to consumers e.g. Theft, damage etc.
  5. It is impossible for manufacturer to have stores all over the country. Therefore middleman are important because they are scattered all over the country and they can offer storage facilities in all regions.
  6. Many manufactures do not have financial resources to sell directly to consumers eg. Transport cost.
Arguments against middlemen (Assignment 2)
  1. Rise in price
  2. Producers profit reduced
Types of Mercantile agents
A Broker is an agent who represent a buyer or a seller in negotiating a purchase or a sale without physical handling of the goods.
Characteristics:
  1. They do not possess the goods.
  2. They have limited power price and terms of sale.
  3. They do not have authority to receive payment
  4. They do not have power to deliver the goods sold.
  5. They act in the name of their customer (buyer/seller) and not their own name.
  6. They are independent agents who engage in bargaining or agreement between two or more parties for brokerage.
Types of brokers
a) Produce brokers: They negotiate the purchase and sell produce e.g. Maize
b) Stock and share brokers: They negotiate purchase, sell stocks and shares in stock exchange.
c) Insurance brokers: They specialize in negotiating various types of insurance policies to various prospective customer on behalf of insurance coys.
d) Ship brokers: They specialize in negotiating transport by ship like procuring cargo, and charter of ships etc.
e) Court brokers: They negotiate the sale and buy of property of person seized according to the order given by the court.
Role of brokers
  1. They provide professional advice to buyers and sellers which help sellers and buyers to benefits from each transactions.
  2. They are able to secure better terms of sale purchase on behalf of their clients.
  3. They enable the relationship between buyers and sellers.
  4. They are able to render services at cheap rates because they may execute various deals at pear.
B: Factors: is an agent employed to sell goods consigned or delivered to him by his principal for compensation.
Characteristics
  1. They take physical possession of the goods.
  2. They may give credit to a reasonable extent as allowed by the principal.
  3. They have great saying in price.
  4. They are general agents who sell goods for other on commission basis.
  5. They finance the principal by making immediate payment and assume responsibility of collecting payment from the customers.
DISTINCTION BETWEEN BROKERS AND FACTORS.
  1. Broker does not possess the goods while the factor does.
  2. Broker cannot receive payment while the factor does.
  3. Broker has no insurable interest in the goods transacted while the factor has the insurable interest.
  4. Broker has no right of lien on the goods but the factor has a right on goods in his possession for the unpaid charges.
  5. Broker is a special mercantile agent while factor is a general mercantile agent.
C: Commission agents. Are middlemen who buy and sell goods for his principal in return for commission.
Characteristics of commission agents:
  1. They get fixed commission.
  2. They do not bear risks. The risks are borne by principals.
  3. They are experts in the goods dealt in.
  4. They buy and sell in their own names.
  5. They are liable for the contracts as they act in their own names.
D: Delcredere agents. Are agents employed by the principal to sell and guarantee payment for all goods they sell irrespective of the payment received or not received by him for an extra additional commission called delcredere commission. They are personally liable for default of customers. Introduced by him for extra commission paid for that guarantee.
E: Auctioneers: Agent employed to sell goods at the public auction.
Features:
1. They are specific agents until the goods have sold
2. They take possession of goods
3. They sell on cash, if they sell on credit they are personally liable for bad debts
4. They have authority to receive money from sale
Roles
  1. They undertake promotion to the public
  2. They are responsible to try to find and sell to the highest bidder deduct the expenses and remit the balance to the seller
  3. They collect debts (if goods) sold on credit
F: Warehouse keeper: is an agent who receives goods and store them on behalf of owners in return for warehousing charges
Features
  1. Responsible for storage and take care of goods preserved by them.
  2. They can retain the goods until they receive payment.
G. Underwriters agents: Persons or firms who guarantee the subscription (sale to the public) of whole or portion of the shares of a company in turn they are paid commission.
Features:
  1. They are specific agents.
  2. They are dealing in guaranteeing shares or debentures.
  3. They receive commission as a percentage of the face value of subscribed shares or debentures guaranteed by them.
  4. They pay or take unsubscribed shares or debentures.
H: Clearing and forwarding agents. Are persons or firms employed by importers and exporters to collect deliver and forward goods on behalf of them in return they are paid commission.
DUTIES OF CLEARING AND FORWARDING AGENTS
  1. To collect, deliver and forward consignments of importers and exporters.
  2. Packing, marking and dispatch of the goods to the proper destination.
  3. At the port of importation, they examine quantity and quality, warehousing arrangement or transportation to the premises of importers.
Advantages of clearing and forwarding agents.
  1. They have experience (knowledge) on importing and exporting procedures e.g.: customs formalities which is quite beneficial to importers and exporters
  2. They reduce cost by dealing with various consignments of different clients of same location hence reduce transport cost.
  3. They relieve importers or exporters from difficult task of collecting and forwarding the goods.
  4. They charge lower commission.
I: Manufacturing agents. These agents are engaged by a manufacturer to sell part of his entire products in a specific territory or market area.
Features:
  1. They are engaged by manufacturers(not employed)
  2. They sell in a specified market area.
  3. They do not fix prices and terms of sales as are fixed by manufacturers themselves
  4. They are paid commission based on sales.
J: Selling agents: Middlemen employed by a manufacturer to undertake the entire marketing functions of all his output for the entire market.
Features
  1. They are employed by manufacturers
  2. They perform all marketing functions
  3. They have greater authority in marketing than manufacturing agent
  4. They determine price and terms of sale.
How agricultural products are distributed in Tanzania
We have mainly four channels for agricultural products in Tanzania
  1. Traders collect the produce from the farmers (producers) and transport to the relevant markets where there are customers.
  2. Farmers (producers) especially small scale farmers sell direct to consumers by transporting goods from villages (farms) to various markets: E.g. Vegetable growers.
  3. Farmers become members of cooperative societies and sells direct to the cooperative societies: Then cooperative societies sell the product either to local consumer Industries or foreign buyers.
  4. Farmer’s sells to cooperative society, the cooperative society sell to marketing board, then the marketing board sells to a local buyer, foreign buyer or industries.
How imports and exports are distributed in Tanzania?

Imported goods.
Tanzanians import goods from foreign producers through the following middlemen (intermediaries)
  1. Import merchants.
  2. Stockiest distributors.
  3. Commission agents
  4. Import brokers
  5. Manufacturers’ representatives.
Exported goods: Tanzanians export their products through:

1. Marketing boards
2. Export agents
3.Export merchant
4.Auction
5.Exchanges
DOCUMENTS RELATING TO THE PURCHASE AND SALE OF GOODS
Documents are written records of transactions which take place between sellers and buyers. These documents can be divided into
1.Those related to the goods.
2.Those related to payment for the goods.
Importance of documents
  1. Trade statistics: They firm the basis from which the government can publish statistics like value of goods produced, value of goods sold within or outside the country.
  2. Preparation of financial statements: Documents are used to draw up a set of accounts and financial statements.
  3. A basis for a contract: Some documents act as contract on the parties concerned. E.g. an order
  4. Tax assessment: Documents provide information which can be used by tax authority in assessing tax to be paid.
  5. Used as evidence of transaction hence ownership.
Documents related to the goods (Purchase and sale of goods)
In the sale of goods
1.Inquiries: A trader who intends to buy goods from a supplier will write a letter (letter of inquiry) to look for more information which he did not get from advertisement before the actual place of an
order. An inquiry can also be made orally through phones, or mere visit.
  • The main purpose of an inquiry is to get information on whether the supplier stocks certain goods. Prices, quality of such good, discounts allowed whether credit is given, method of payment, terms of delivery etc.
Types of the letter of Inquiry
  1. General letter of inquiry: Asks for general description on particular products.
  2. Specific letter of inquiry: Asks for interested specific features on the products or specifies the area of particular interest.
  3. Quotations, Price list or catalogue, Preform Invoice, Estimate or tenders. On receiving a letter of inquiry the supplier may send:-
(i) Quotation: Is an offer to sell certain goods under conditions stated. It is more specific and it is used in reply to inquiries for which no regular or standard price lists or catalogues are available. It is in the form of a letter although some larger firms have printed quotation forms.
– Quotation can be
a) First hand: quotations are those quotations given by manufacturers or Products to traders (wholesalers and retailers)
b) Second hand quotations: Are those quotations given by Traders to consumers
It includes details of:
-Price charged trade discount, terms of delivery, terms of payment
(ii) Price list: Is a list of items sold together with their respective prices. It does not carry a lot of information and is useful only if the commodities listed therein are well known or are of popular brands.
Note:
A price current: is a price list which shows the price of goods listed at the time it was made out or simply market price of goods listed at the time the list was made out. It does not constitute a promise to sell at the price stated. It is highly used by raw materials dealers.
(iii) Catalogue: Is a booklet which briefly describes each item offered for sale. Carries illustrations and is more informative and attractive them a price list photographs or prints of stocked goods if possible coloured and numbered.

(iv)Pro-forma Invoice: Is an Invoice given to a customer who decides to order.
Circumstances when the pro-forma invoice can be used.
a) A quotation is asked for, by buyer
b) Goods are sent on approval to inform the potential customer of the amounts to be paid if he decides to keep them
c) An order has been received and the supplier wants payment before dispatching goods.
d) Goods exported to inform overseas buyer or his agent of the price to be charged on the goods.
e) An importer is processing foreign exchange from the central bank for the importation of goods.
f) Given to the customs and excise authorities as evidence of the value of goods imported forming the basis for the calculation of duty.
g) Requesting payment from an Unknown customer before goods are delivered to him.
(v) Tender: Is an offer to do something made in response to an advertisement/inquiry or inviting quotations for the supply of specified goods or for execution of specified work. E.g. tender for building classes asked by Government.
-Tender is the first step toward a contract
-The buyer calls tenders then competitive tenders are submitted with detailed quantities and qualities then interested one is accepted by placing order.
(vi) An estimate:
Is a written offer to do certain work at a stated cost in a specified way and under specified conditions. They are more often used in connection with premise.
Estimates are usually subject to adjustment based on alterations in market prices of materials.
(vii) An purchase order: A letter or pre-printed form sent by the prospective buyer formally asking for supply of specified goods, this is done after the trader has received all necessary information.
Order can be in any of the following ways:
  1. Verbally
  2. Writing an order letter
  3. By filling in an order firm
NOTE:
-It is not wise to place orders verbally as problems may arise due to misunderstanding of instructions, lack of proof or order.
-If there is an a cute need for the goods and there is no time to go through the formalities of writing order verbal orders may be given followed by written order as soon as practicable.
Contents of order
  1. Addresses of the customer and supplier.
  2. The products or code number of goods ordered.
  3. The ordering date. etc.
Acknowledgement note: Is a note sent by the buyer to those who submitted their tenders but could not get the goods ordered due to some reasons. The aim of this note is to thank and encourage them to submit more tenders in the future.
L.P.O (Local Purchase Order): Refer to an order issued in home trade.
EXECUTING THE ORDER
The following is a typical procedure usually followed in executing the order where the goods are in stock.
  1. The orders received are stamped with the date of receipt.
  2. The order department reviews the orders to identify any inaccuracies or ambiguities
  3. Orders are then passed to the credit department, which they are stamped and credit approved if they are credit orders.
  4. The orders are then passed to the invoicing section where numbered sets of invoice prepared
  5. Instructing the warehouse keeper to prepare and pack the goods ready for dispatch.
(viii)Bought note: is a contract note send by a buyer to a seller stating the terms and conditions of a purchase arranged orally. It starts with words bought of
(ix)Sold note: Is a contract note send by a seller to a buyer stating the terms and condition of a sale arranged orally. It starts with words sold to
(x)Advice note: Is a document sent by the seller to the buyer informing him that the goods have been dispatc
hed to him.
– It acknowledge the receipt of order and it shows when the goods will be delivered sometimes an invoice can serve as advice note.
(xi)Delivery note: Is a document sent by the seller to the buyer which shows the list of goods without their prices. It is used to check the goods delivered.
– It evidences the delivered of the goods.
– One copy of it is returned to the seller dully signed and a buyer return one copy.
– It proves that the goods have already been received by the buyer.
– It is used alone when goods supplied are not in different packages.
(xii)Packing note: is the document sent by buyers shows the list of items packed in a particular box, it is enclosed with goods.
– It shows the order number.
– It shows the number of packages.
– It uses is not very common because delivery note serves the same purpose.
(xiii)Invoice: is the official accounting document sent by the seller to the buyer setting out details of the goods supplied description, quality, unit price, value, trade discount, net amount, terms of payment
– Several copies are prepared according to the size of the business.
– Is used by the buyer to cross check against the quantities and qualities delivered.
– It notifies the buyer of the amount owed by him for the goods or services bought by him.
– It serves as the evidence of the debt.
– It is used as the basis of accounting entries.
– Once the buyer receives an invoice he should affect payment as per invoice.
DISCOUNTS: Trade discounts, quantity discount and cash discount.

(a)Trade discount. Is an allowance given by a trader (wholesaler or manufacture) to the retailer to enable the retailer to meet various business expenses and get a profit margin.
– It is made if goods are sold by one businessman (usually a manufacture or a wholesaler) to another businessman (usually a retailer)
– It is issued on goods whose price is either fixed, controlled or generally known
– The aim of giving it is to allow a retailer to get a certain profit margin and to meet various business expenses.
– It is expressed as percentage of gross value
(b)Quantity discount: is an allowance which is offered according to the quantity of the goods ordered.
– A higher rate of discount is offered for larger quantities
– It is offered in addition to trade discount i.e. both can be offered in respect of the same transaction.
– It is expressed as percentage of the gross value of the goods sold.
– It is not deducted from the invoice
(c)Cash discount: Is an allowance granted to the buyer to encourage him to pay within the specified period. I.e. prompt payment.
– Earlier payment by the buyer fetches a higher rate of discount and vice versa
– It is allowed only if payment is made within the specified period
– It is given to encourage buyers to pay their accounts promptly.
A bill:– Is a document issued to claim payment for the services rendered, examples professionals like doctors, lawyers set bills so as they can be paid for rendered.
– It is similar to an invoice.
Debit note: It the document sent by the seller to the buyer to correct for the undercharge on the original invoice which can be caused by charging wrong price wrong casting (totals), omission of item packed and sent, omission of deductions e.g. Taxes (VAT) or when a customer fails to return containers not charged for, in the invoice. It is usually printed in black or blue
CREDIT NOTE: Is the document sent by the seller to correct overcharge on the original invoice which can be caused by charging wrong price, wrong casting, when customer returns some goods due to defectiveness, delivered goods not ordered. It is usually printed in red to distinguish.


EcoleBooks | COMMERCE As LEVEL(FORM FIVE) NOTES - TRADE IN GENERAL

subscriber

Leave a Reply

Your email address will not be published. Required fields are marked *

Accept Our Privacy Terms.*