Editor’s Note: This blog post was originally published in September 2017 and has been fully updated and improved in August 2023 to be comprehensive and easily understood.
Selling on consignment is a useful arrangement that allows a supplier and usually a retailer to create a “win-win” situation, where they both share part of the risk of holding inventory.
Consignment occurs when the consignor (the supplier) sends goods to a consignee (the retailer). The Retailer then later sells them to their clients. The goods remain under the legal ownership of the supplier. The retailer is required to pay for them only after they have been sold to customers. This way, the retailer can return any unsold stock to the supplier without facing monetary penalties.
Consignment Accounting
From an accounting point of view, when the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of the products. Just record the change in location within the inventory record-keeping system of the consignor.
In the meantime, the consignee keeps track of the products in their own inventory management system. This way they will be able to easily create a purchase invoice for the consignor when some of the received products are sold.
What Is In It for the Consignor
The business owner that decides to do selling on consignment gets great benefits from a consignment arrangement. As long as you consider logistics, the inventory costs are reduced because less storage space is needed. This can be a great relief for your budget. At the same time, you can sell your products and reach a wider customer audience. Because store owners can be reluctant to purchase products from less widely-known brands, a consignment arrangement might ease their fears of getting stuck with an unsellable inventory. Lowering the risk for the consignee gives the consignor a better opportunity to get their goods out to the consumers.
Nevertheless, certain disadvantages of this model should not be overlooked. Lack of visibility of products can have a negative effect on your finances as the consignor. Especially slow-moving or dead products can create this issue. The retailer is not pressed to move the slow-moving products by applying sales and offers and the supplier might end up with large quantities of antiquated and unsellable inventory.
In other words, it is a risky arrangement, a double edge sword, that can allow a new brand to get into more retail channels. At the same time, if the retailer is not actually selling the products, your inventory investment as a consignor might not generate a return.
What Is in for the Consignee
The retailer who chooses to purchase products on consignment can see great profit in this model. Without the risk of paying for the stock you replenish, a consignee is able to offer a wider selection of products. This is great if you aren’t able to invest a lot in your inventory upfront.
Even if cash flow is slow in a given period of time, you can still have products to sell on their shelves. How convenient!
Make the Most Out of Consignment
While selling on consignment can be a highly beneficial situation for many businesses, it can have some serious disadvantages for the consignee. Thus, the arrangement must be made on solid ground.
In order to avoid conflict, a common agreement about who is responsible for destroyed or returned products is important. This needs to be clear for both parties before suppliers bring their products to the retailer’s warehouse or store. Even if the original price of the products is relatively low and this seems unnecessary, a clear arrangement will reduce misunderstandings and conflicts. It’s always better to be clear than to have to work it out later.
In any case, the consignor and consignee have a great opportunity to support each other in a highly antagonistic business world. If both parties are feeling positive about the agreement, they can take it a step further. Coming up with a common marketing plan could take the partnership to the next level. This is a creative way of increasing sales!
In order to enable this setting, an inventory management system can help achieve the desired level of transparency between the two parties. Transparency will naturally assist the growth of their collaboration. With inventory management, both parties are able to share accurate information about the situation of the goods.
If you don’t have inventory management set up yet – don’t worry! Megaventory is easy to set up and you can start purchasing and selling on consignment in no time.
Consignment in Megaventory
Handling consignment sales in Megaventory is super easy.
From the consignor’s perspective, you just need to create a New Sales Order where the goods get shipped out “on consignment”. When the items have been sold to consumers, you can create the invoices as required.
The consignee’s approach is similar. The only difference is that they create a Purchase Order.
At any point, you can check how many purchase or sales orders are shipped but not billed or invoiced. Go to your order list and create a view that shows the number of orders with a status of Shipped or Partially Shipped but not Invoiced. The conditions in the List Views allows for this:
Once the list view is available, you can use it to filter just the Sales Orders that need processing under consignment.
It’s that simple and user-friendly! All your orders on consignment are in one place.
Conclusion
To sum up, consignment is a cost-effective model for business with a lot of potential. It also has risks. However, when handled properly it can be an efficient tool for business growth. Purchasing and selling on consignment has its pitfalls but is also worth exploring, especially with Megaventory’s help.
That’s very good point