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Consignment Inventory for Beginners: What It Is & How to Start

Posted by Micah HartmannLast Updated June 17th, 2024
— 10 minutes reading

When you hear “consignment inventory,” your mind may wander to the olden days when your mom would drag you up and down the aisles of Goodwill or Salvation Army after school.

Did you know you can sell your goods (new or used) on consignment by partnering with a retailer?

Is there a shop in town you’ve wished would carry your products, but they weren’t ready to partner with you because you have a brand-new business and no reputation? Maybe you’re established, but the retailer doesn’t know you and is hesitant to hand over a fat check to purchase some of your products wholesale.

That retailer may not take you up on your wholesale offer just yet, but they might consider selling your items on consignment in their store. It’s less risky for them and an excellent opportunity for you to grow your brand and bring in some extra money. It’s also a way to test your products to see what sells well in person and what doesn’t.

So what exactly does it mean to sell on consignment? How does it work? Why aren’t more people talking about it if it’s such a great option? We put together this comprehensive guide specifically to address your consignment-related inquiries. Or, if you prefer visual content, check out our video on consignment inventory below; otherwise, read on!

Consignment Inventory for Small Businesses: What It Is & How to Start

What is consignment inventory?

We’ll start by explaining what consignment inventory isn’t. Traditionally, when a business works with a retailer, the retailer pays for that business’s products upfront – before they’re able to sell them in their store. The business makes a profit right then and there as they exchange their products for profit. On the flip side, the retailer has to sell the products to customers before making any money.

How consignment inventory works

With consignment, the supplier (consigner) hands over their inventory but doesn’t transfer ownership or make any money until the retailer (consignee) sells that inventory to their customers. Read that again if you need to. We know it was a mouthful.

Once the retailer makes a sale, the supplier will profit and pay the retailer a commission (often 20-60% of final sales). If the retailer fails to sell all the stock, they can return any unsold items to the supplier risk-free.

Selling on consignment begins when your business approaches a store and provides them with the product. Once the customer buys your product from the store they take a percentage and you keep the rest.

Consignment inventory can be a cost-effective way for retailers to stock their stores. And it allows suppliers to gain exposure without spending extra money marketing, selling, or displaying their products. It can be a win-win situation if both parties understand and agree upon the contract’s terms.

Selling on consignment can be a great way to bring in extra cash flow and get your name out there from more of the world to see.

Consignment inventory vs. vendor-managed inventory

Vendor-managed inventory (VMI) is precisely what it sounds like. A vendor is responsible for managing their own inventory supply. VMI is a business model for maintaining inventory, as opposed to consignment inventory, which is a way to exchange inventory ownership.

Consignment vs. wholesale

When you sell wholesale, you sell products directly to a retailer in exchange for payment. The retailer will then try to sell your products to their customers. When they do, they get to keep 100% of the profits. If you’re the wholesaler, the retailer is your customer. However, the retailer is more like your salesperson in a consignment arrangement.

How to deal with consignment inventory in your accounting

If you’re selling on consignment as well as through other channels like an online shop, it’s important to make sure you keep your consignment inventory accounting records separate. The reason for this is that the cost of goods sold (COGS) for your consignment inventory will likely be different than your COGS for inventory sold through other channels. 

When you send consigned inventory to the consignee, there is no need to create an accounting transaction. A stock transfer to a separate location would work great for this to keep track of everything you’re selling on consignment. Only once the consignment inventory is sold would a transaction for a sale be created for accounting purposes.

Wholesale payments start and end when your business approaches a store and they agree to buy your products. At this point you are paid. Once your products are sold the store keeps all of the revenue.

An example of consignment inventory in action

Let’s say, Jane, an artist, wants to sell her products at her favorite shop downtown. The shop sells curated work from local artists, as well as some of their own branded goods.

Jane wants to start by testing two products: a greeting card set and a poster. She makes an agreement with the shop and hands off 50 sets of greeting cards and 100 posters. The shop owner loves her work and is thrilled to add the products to the other items on her shelves.

Now imagine Jane’s posters sell out within a month! Her greeting cards, however, need some help. It’s been 60 days (the term limit set in their agreement), and she’s only sold 30 of the 50 sets. The store owner hands back the remaining 20 that didn’t sell.

Overall, the consignment deal was a success. Both Jane and the store owner made money. Now Jane needs to find another way to sell the greeting cards or develop a more appealing design.

What are the pros & cons of selling on consignment?

Consignment inventory can be beneficial to both consigners and consignees for several reasons. But it’s also important to be aware of the possible downsides of selling this way. Here’s a quick list of pros and cons to help you decide whether to give consignment a shot or stick to more traditional methods.

Advantages for consigners (suppliers/product owners)

  • You don’t need to buy or rent your own retail space and hire employees to run your store.
  • You can get your name and products in front of new customers, increasing your brand recognition.
  • Customers can see and feel your physical products before purchasing.
  • You have a better chance of breaking into a bigger, more competitive market as a small or newly established business.
  • You can build your reputation.
  • You won’t have to pay as much for inventory storage.
  • It’s easy to test new products to determine what sells well and what doesn’t.
  • Your products will stand out by being different from what the retailer already offers.
  • You can potentially form a long-term relationship with your retailer.
For the consignment inventory agreement to be successful, both parties (the consigner and the consignee) need to be upfront and clear about their expectations

Disadvantages for consigners

  • You won’t receive payment until the retailer sells your products to their customers.
  • If your products don’t sell in the store, you’ll have to take them back and figure out how to sell them elsewhere (or not at all).
  • Selling on consignment doesn’t make sense for every type of product.
  • You depend on (and trust) someone else to sell your inventory.
  • If products are damaged or don’t sell, which are both out of your control, you could lose money.
  • Purchasing a large amount of inventory could be expensive upfront.
  • Since you assume most of the risk in the relationship, your retailer may not actively try to sell or promote your products.

Advantages for consignees (merchants/retailers)

  • You don’t have to pay for goods until you sell them.
  • You can return the items if you can’t sell them.
  • It’s a low-risk, low-cost investment because you don’t have to purchase inventory upfront.
  • You can quickly expand your product selection.
  • You can avoid stockouts.
  • New products could attract new customers.

Disadvantages for consignees

  • You may have to cover inventory carrying costs (storage, security, etc.).
  • You have to make room for new inventory.
  • You may be liable if the products are damaged in your store or stolen.
  • You have to manage consigned inventory separately from your regular inventory.
  • Most inventory systems don’t handle consignment inventory very well, so you may have to purchase a separate software program.

We recently released a podcast where we discuss consignment inventory in depth. Be sure to check it out!

Secret Life of Inventory | What is consignment and how does it work?

What are consignment inventory management best practices?

Selling on consignment can be complicated if it isn’t well managed. To ensure the pros we just covered outweigh the cons, follow these three best practices.

1. Draw up a win-win contract.

For the consignment inventory agreement to succeed, both parties (the consigner and the consignee) must be upfront and clear about their expectations. Be sure to put some thought into your answers to the following questions as you fill out your consignment inventory agreement:

  • What percentage will the consignee take from the purchase price as a commission (this could range anywhere from 20-60%)?
  • Are there extra fees involved in storing or marketing products on the shelves?
  • What is the consignment period/how long will the consignee keep the product on the shelf? (This is typically 30-90 days.)
  • When will products be paid for?
  • Who is responsible for shipping costs?
  • How will unsold products be returned to the consigner?
  • What’s the freight policy?
  • What’s the return policy?
  • Who is responsible for buying insurance coverage for the products?
  • How will transactions be processed?
  • What information should you exchange after a customer makes a purchase?
  • How will regular communication take place?

We recommend using LegalZoom’s consignment agreement template so you don’t leave out anything essential.

Consignment inventory can be a cost-effective way for retailers to stock their store. And it allows suppliers to gain exposure without spending extra money marketing, selling, or displaying their products

2. Form a symbiotic relationship with your business partner.

Think back to elementary school when you learned about a bee’s relationship with a flower. Bees collect nectar to feed their colonies while simultaneously spreading pollen from flower to flower. The relationship is mutually beneficial. Your agreement with your business partner should be the same way. Best-case scenario, it goes above and beyond your written contract.

Both you and your partner should be in it to win it. If you’re on the supplier side of the relationship, you should do whatever you can to ensure your product will succeed. If you’re the retailer, you should try to sell your supplier’s products as best as you possibly can.

Maybe you both agree to collaborate on marketing or develop an advertising campaign together. Just remember, the more you can do to get the right products in front of the right customers, the more sales you’ll have and the happier everyone will be.

3. Use consignment inventory management software.

Have you been wondering how in the world you’re going to keep track of all your products, the retailers you’re working with, customers, and sales? inFlow Cloud is our robust inventory management software, and we also have a guide on how to use inFlow to manage consignment inventory.

The program will help you closely monitor what you have left in stock and what’s on order. You’ll know exactly when to restock and can do so right inside the program.

Top inFlow Cloud features that help with consignment:

  • Inventory management across web, Windows, and mobile
  • Multiple storage location support
  • Sales and purchase tracking
  • Reporting
  • Integrations (like ecommerce and accounting)
  • Barcoding
  • And a whole lot more!

Is consignment inventory right for my business?

Consignment inventory is typically riskier for consigners than for consignees. If you have products you need to sell, we recommend consignment as one avenue for customers to find and purchase from you. There are better ways to sell your stuff full-time since you’re placing a lot of control into someone else’s hands. That certainly doesn’t mean it’s an unwise option, however.

Selling on consignment gives you a chance to break into bigger and more competitive market as a small or newly established business.

Selling on consignment can be a great way to bring in extra cash flow and get your name out there for more of the world to see. That’s huge! Another potential advantage of cutting a consignment deal with a retailer is the opportunity to sell wholesale to them eventually. It may be a matter of developing your relationship and building your reputation over time.

If you’re ready to try consignment inventory or have been looking for the right software to help you stay organized, we have the perfect cloud-based solution.inFlow Cloud will help you efficiently manage your inventory stock on consignment. Try it today.

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