Post on Wednesday, December 20th, 2017 in Accounting
The return of consignment sales has attracted many entrepreneurs, and now it seems to be a profitable niche. In this article, we will explain consignment and take a look at benefits of selling on consignment.
In the most basic terms, consignment is an arrangement where one person or entity of gives another custody over materials or goods to sell while still legally owning them. When a sale is made, the supplier is paid.
This is the type of inventory that is still owned by a supplier, but is held as stock by a retailer.
Accordingly, consignment sales is the process during which a supplier (consignor) gives the goods on consignment to a retailer (consignee), who will later sell these goods and pay the consignor.
The relationships between consignors and consignees differ from the traditional buyer-seller relationships. Goods on consignment are still owned by the consignor until someone decides to buy on consignment; moreover, the consignor has the right to take back the goods before they are sold.
A typical scenario of selling on consignment is selling old, redundant or used clothes, household appliances, furniture, and other stuff in a consignment store. If a consignor is a private individual, it is a good opportunity for them to make some money, especially if they are tight on budget.
The retailer has no risk with consignment goods, so they instantly place those goods in front of customers. As a result, there is often not a need to store the goods in a warehouse and wait until they are sold. The retailers want to see how the consignment stock will sell, so they place it directly on the shelves in their shop, thus reducing the storage costs.
Traditional retail establishments may not accept new goods in fear that they may not sell. With consignment, the consignor has more chances to showcase their goods and see how they sell.
This is a win-win for both the consignor and consignee. Consignees are regularly restocked by consignors without having to tie up capital in inventory. When something sells, another consignor fills the space. Each side of this deal owns a part of the business entity. Consignors own the products, consignees own the distribution.
When selling consignment, the supplier and retailer can agree upon one of the two payment types, depending on the goods: upfront payment and profit sharing.
Upfront payment means that the consignee pays the consignor a fixed price right after receiving their consigned inventory; however, the rest of the profit belongs to the consignee, no matter the size.
On the contrary, profit sharing implies dividing the profit from sold goods between the supplier and the retailer on a previously agreed rate, after the goods are sold. Typically, percentages of consignment selling can amount up to 70 percent of the sales price.
When selling on consignment, it is important to consider the following rules:
However, if both of you conclude a consignment agreement, you will get more flexibility on deciding whether to change these rules.
Now, when you know the benefits and rules of selling on consignment, you will probably want to know how to manage consignment sales. Especially if you’re a sending consignment inventory to multiple locations, you’ll want to track inventory and make sure you don’t lose any product.
Consignment sales management can sometimes be a real headache. Regular movements of consigned inventory require accurate tracking, and it is crucial to avoid errors and ensure smooth inventory management workflow. However, there is always a way out – you can use consignment sale software to facilitate these processes.
Dynamic Inventory offers a convenient option to manage your inventory at different locations. It is also possible to use this feature to manage sales on consignment.
You can consider the consignment retailers as inventory locations, where you can transfer the items from the primary location and create sales orders when they are sold. Feel free to contact us today and learn more. We can also schedule a personal demo for you, so that you can manage your consignment sales quickly and effortlessly.
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