What it means
Two parties are involved. The consignor owns the goods and carries the risk, and the consignee holds them, displays them and sells them on the consignor's behalf for a fee or commission.
The appeal to the retailer is obvious: shelf space is filled without tying up cash or taking any risk on stock that does not sell. The appeal to the supplier is access, since a new brand can reach shelves that would never take a firm wholesale order.
Accounting follows ownership rather than physical location. The consignor keeps the goods in its own inventory, recognises no revenue on despatch, and books the sale only when the consignee sells to the end customer.
The economics are different from wholesale in a way that is easy to misread. Consignment commissions are a share of the retail price and are typically far higher than the discount a wholesaler would take, but the supplier keeps the retail margin and only pays on goods that actually sell.
The hidden cost is working capital and control. The consignor funds inventory sitting in someone else's premises, needs a reliable count of what has sold, and has to build in the risk of damage, theft and stock returned at the end of the season in unsellable condition.
In practice
Real-world examples.
Example
An independent jewellery maker places pieces with three boutiques on consignment at a 45% commission. The arrangement gets the work in front of customers with no upfront order, but the maker funds all the metal and stones and waits for each sale to be reported.
Example
A book publisher supplies a chain of airport shops on a sale or return basis, which works like consignment in practice. Titles that do not move are shipped back after ninety days, and the publisher absorbs both the freight and the damaged copies.
Example
An industrial fastener supplier keeps consignment stock inside a customer's factory. The customer draws parts as needed and is invoiced monthly for what was consumed, which cuts the factory's own inventory to nearly nothing while the supplier funds it.
Formula
Calculation
Consignor proceeds = units sold x retail price x (1 - commission rate)
A homeware brand places 700 ceramic lamps with a department store on consignment. The retail price is $80, the store's commission is 40%, and the lamps cost the brand $30 each to make.
By the end of the season the store has sold 500 units. Gross retail sales are 500 x $80 = $40,000, the store keeps 40% = $16,000, and the brand receives $40,000 - $16,000 = $24,000. Cost of goods sold on those units is 500 x $30 = $15,000, so the brand's gross profit is $24,000 - $15,000 = $9,000, a margin of $9,000 / $24,000 = 37.5%.
The remaining 700 - 500 = 200 lamps were never sold and never left the brand's balance sheet, sitting there at 200 x $30 = $6,000 of inventory to be returned or marked down. For comparison, a firm wholesale order of the same 500 units at a wholesale price of $44 would have produced revenue of $22,000 and gross profit of $22,000 - $15,000 = $7,000, so consignment earned $2,000 more but forced the brand to fund and carry the 200 unsold units itself.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Ashcombe Ceramics, an invented tableware maker, agreed a consignment deal with a national department store: 700 lamps at $80 retail, 40% commission and a six month term. The founder treated the despatch as a sale and recorded $40,000 of revenue in the month the lorry left, which flattered the half-year figures considerably.
The bookkeeper corrected it at the year end. Revenue could only be recognised on the 500 units actually sold, and at the consignor's share, so $24,000 rather than $40,000, with the 200 unsold lamps restored to inventory at cost of $6,000. The restatement wiped $16,000 off reported revenue and prompted an awkward conversation with the fictional company's bank, which had lent against a revenue covenant.
What the invented business changed was reporting rather than strategy. It kept consignment as a route into large retailers, but built a monthly sold-through report into the contract so that revenue was recognised as it was earned and unsold stock stayed visible on its own balance sheet.
Watch out
Common mistakes.
- Recognising revenue when goods are despatched to the consignee, when ownership and therefore the sale only transfer once the end customer buys.
- Leaving consignment stock out of the inventory count because it is physically somewhere else, which understates both assets and insurable value.
- Comparing a consignment commission directly with a wholesale discount, when the two are calculated on different bases and carry different risks.
Questions
People also ask.
Who insures goods held on consignment?
The consignor usually remains responsible because it still owns the goods, so the contract should say explicitly what the consignee is liable for if stock is damaged or stolen.
Is sale or return the same as consignment?
It is very close in practice, though sale or return often transfers title on delivery with a right to give it back, whereas consignment leaves title with the supplier throughout.
How does consignment affect a supplier's cash flow?
It usually makes it worse in the short term, because the supplier funds production and holds inventory for longer before any cash arrives.
From the founder's library
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