Consignment! What is Good, What is Bad

Consignment is a great way for a retailer to sell their products by partnering with a number of resellers, who act as an intermediary to sell on the retailer’s behalf without transferring ownership of product until the product is sold. The consigner (retailer) is the owner of the product and the consignee is the reseller. In a consignment arrangement the products are stored at the premises of the consignee (reseller). Once the products are sold the consignee is obligatory to pay the consigner (retailer) for the product.

In the accounting books, the inventory will still be showing on the books of the consigner until the products are sold by the consignee. The consignee does not record the inventory given for reselling in its accounting books.

The Pros of Consignment:

Reduced Financial Risk

• For Retailers: They don’t invest heavily in inventory upfront. You provide the products, and they pay you a pre-agreed percentage only when items are sold. This minimizes the risk of overstock and unsold goods.
• For Sellers: You can enter markets or test new products without a significant initial financial burden. It’s a low-risk pathway to validate demand before scaling up production.

Increased Market Exposure

• Consignment allows sellers to access established retail channels and customer bases that might otherwise be difficult to reach. Even a niche product gains visibility alongside other popular items, potentially drawing in a broader audience.

Flexible Inventory Management

• Both parties can adjust inventory based on real-time demand. Sellers can refresh or rotate items without committing to long-term contracts, while retailers enjoy dynamic product offerings that keep stores fresh and appealing.

Enhanced Collaboration and Marketing

• By partnering up, both the consignor and consignee share marketing responsibilities. This synergy can result in creative promotions and a better chance to boost sales collectively.

Faster Inventory Turnover

• Because both parties have a vested interest in selling items quickly, there’s often a stronger push to move the inventory, which keeps cash flowing and minimizes storage issues.

Low Barrier to Entry

• Especially valuable for new, artisan, or small businesses, consignment lets you showcase your product in physical retail locations without the pressure of buying bulk inventory. It’s an ideal way to test the waters of consumer interest before committing to larger production runs.

The Cons of Consignment

Tracking Inventory

• It is very difficult to track inventory without the aid of a good software. Even with software the resources employed can be very significant. The consigner (retailer) needs tools to assist in tracking the movements to goods to each consignee (reseller).  This can be even more difficult if there are large quantities are being transferred or were there are multiple transfers being done over a period of time. The consigner also needs to track when goods are been sold from the consignee’s premises. Consequently, the consigner is dependent on the consignee’s being attentive to the sales of their product in order to receive the neccessary information for billing.
• The consignee (reseller) also needs tools to assit in tracking the availability of inventory on stock. In the consignee’s accounting books the consigned inventory is not listed as being in stock and does not appears to be available in store. This is very critical, because the consignment aggreement may stipulate that the absense of the consigned product from the consignee’s premises may constitute as a sale. Therefore, it is important for the consignee to protect the consigned products as this will result in lost of revenue and profits.

Documenting Transactions

• The difficulties of tracking inventories also has an impact on the documentation process. The consigner needs the information regarding the sale of their products to recognize revenue and send invoices to the consignee. The consigner also needs to collect the funds from the consignee for the sale of the products. Therefore, in this case timing is essential, because this affect the working capital turnover or the time it takes for the goods to be transferred to the time the funds are deposited into the consigner’s bank account. Sometimes the documentations are delayed that makes reconciliation difficult and therefore, accounting errors can be significant.

Managing the Agreement

• The consignment aggreement is likely to be customized between different sellers and vendors and dependent on the type of products. Complexities are triggered by product types, location, regulation and managmement understanding of the aggreement it self. It is these complexities that will make managing the aggreement difficult.

The Consignment Agreement