Consignment Sales for Your Business: Pros and Cons

by / ⠀Finance / February 1, 2023
person checking out at store counter

When it comes to having your own business, it is good to pick out a business model that works for you. Luckily, you are able to pick what kind of model you want by going to businesses and asking the business owners how they do it. Or, they, can use the world wide web to find online resources as well. It is important to explore the different business models because you need to understand the pros and cons of them and how they affect your business. For one business model, consider the route of using consignment sales.

This article will explain what consignment sales are and what their pros and cons are. With that said, let’s start!

What are Consignment Sales?

Consignment sales consist of two parties, the consignor and the consignee. The interaction is when the consignor supplies the consignee in order to sell them. But, the consignee is able to return whatever was not sold back to the consigner. Basically, it comes down to a third party being entrusted with selling products for the owner of said products. This is also known as goods on consignment.

When a consignor sends the product to the consignee, an entry in the books is not required. But, when the consignee has sold the products that they received, they then pay the consignor a sale amount with a predetermined number. The consignor is then to write down debit to cash as well as writing down credit to sales. Then, the consignor would rid themselves of inventory as a debit to the cost of products sold and credit to inventory.

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Now, if a consignee can’t sell everything, then they return the remainder back to the consignor. Before a predetermined date that is. But, the consignor now has to face the risks and rewards of the ownership. Meanwhile, the consignee does not have to pay for the products until sold.

The Pros of Consignment Sales

There are several pros to the consignment sales business model. For the consignor, these are some of their advantages.

  • Allowing to save up on inventory holding costs by sending some of the product to the consignee.
  • With this model, there is less time to spend on making lists to sell products.
  • It is not needed nor required to set up a retail store for your products.
  • For consignees, it can be easy to convince them to stock your goods.

For the consignee, here are some of their advantages:

  • A consignee is not required to pay first before receiving the goods.
  • With unsold goods, they can be returned at no cost, thus less to no risk.
  • A consignee is not required to pay for the products until they are sold to the end users.

The Cons of Consignment Sales

As with anything, there are also cons to the consignment sales business model. For the consignor, the disadvantages for them include:

  • They get less revenue over selling directly to their customers because of the usage of consignee.
  • The consignor is still responsible for risk and ownership of the unsold products.
  • All unsold products return to the consignor at no cost to the consignee.
  • Consignees may not give the products the promotion or visibility to be seen.
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For the consignee, the disadvantages include:

  • Inventory holding costs increased because of large unsold amounts.
  • It can be difficult to manage inventory that comes from consignment sales.

Resources to Use

Consignment sales can get tricky to learn, especially if you are just starting out with it. In that case, be sure to find online resources to assist you. Consider corporatefinanceinstitute.com or CFI for many of your questions and needs relating to business financial questions.

Conclusion

The consignment sales business model has several pros and cons to it. Whether that affects your business is up to you. It may sound simple on paper, but you have to consider other factors as well.

  • What kind of business do you have?
  • How capable are you of using the consignment sales model?
  • The scale of your business.

These factors are all very important to consider because what business model matters.

Now that you know of this particular business model, try to find out more about it from other businesses in your area that practice it. See how it works for them. Gaining that insight, mixed with additional research can help you make an informed decision.

If this model doesn’t work for you, then it’s no matter. What is important is that you get back up again and keep trying. You will find the business model that is right for you. Plus, who knows, maybe consignment sales would be better down the line in your career.

About The Author

Tristan Anderson

Hello! My name is Tristan Anderson and I live in Manhattan, Kansas. I enjoy being in nature and animals. I am also a huge geek who loves Star Wars and has a growing collection.

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