Now a day in order to increase sales, manufacturers hire agents who can sell their goods as it might not be possible for them to look after the debtors and the sales. So also in the case of consignment, the principal hires agents for different places for a commission. Hereby, we discuss the consignment meaning, working, features, pros, and cons.
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What is Consignment?
Consignment is a business arrangement between a consignor (owner) and a third party (consignee). This word has come from the French word “consigner” which means ‘to hand over or to transmit’. The consignee agrees to sell the goods handed over to him by the consignor for a fee. For the consignor, it is outward consignment and for the consignee, it is inward consignment. Also, there is another similar term called consignment shop. The consignment shop is a retail store which displays goods for the buyers for sale.
Clothes, toys, musical instruments, furniture, antiques, automobiles, books, music, tools, etc.
Features of Consignment
- The possession of the goods transfers from one party to another.
- The consignor is responsible for all the risks, expenses and damages associated with the consigned goods.
- The relation of the persons in the consignment is that of consignor (principal) and the consignee (agent) and not of the buyer and seller.
- Only the possession of the goods is with the consignee and not the ownership.
- Profit or loss on the sale of the goods belongs to the consignor.
- The consignor sends Pro-forma Invoice. While the consignee sends Account Sales. Account Sales include the details regarding the goods, sales, expenses, commission, advances, and balances due.
Objectives of Consignment
- To make large consignments and increase sales volume by attracting customers.
- To launch a new product and create and capture the market for the same.
- Earning higher revenue from a different geographical area for the same product.
- To grow and expand the business.
- Sustainment in the domestic and international market.
- To increase sales by utilizing the talent and expertise of the consignee.
Working of Consignment
The consignor sends the goods on consignment to the consignee. The consignee will separate the goods suitable for sales and the ones not suitable (usually torn, dirty goods which may be unsaleable in some jurisdiction). However, until there is an actual sale of the goods to a buyer, one cannot treat those goods as a sale. The terms are predecided for the revenue distribution of the sales and the time period for the goods held for sale. If the goods are not sold within that time period, the consignor reclaims those goods. However, there can be an extension in the time period if it is allowed as per the agreement. In the end, there is a final payment by the consignee to the consignor for the sales proceeds less his part of commission and expenses.
Suppose there is a consignor ‘Ohlin’ who consigns his 20 musical instruments to a consignee ‘Richard’. Richard pays some money in the form of advance to Ohlin. Here there is a transfer of the possession of the goods but not the ownership. However, Richard could only sell 18 instruments and agrees to buy the rest two at a 5% lesser price than the market price. Ohlin agrees for the same. If the instruments would have not yet been purchased by any, then the Ohlin would repossess them. At the last, Richard will do a final payment of the balances due by and to him. He will deduct his part of commission, expenses and obviously the advance.
Advantages of Consignment
Advantages for Consignor
- Increased sales and margin if the consignor is assigning the responsibility of the goods to a skilled and experienced consignee.
- Since the ownership is with the consignor, he may at any time reclaim those goods in the case of any default from the consignee’s end.
- Inventory holding costs are lessened as the goods are sent to the consignee and are in his possession.
- If the sellers want to increase their sales and do not have time to promote their product or look after the customers, they prefer hiring an agent to look after the same.
- If the consignee is well versed with the buyers, market, product, etc. he may sell the product very fast. Hence this would lead to product expansion, better market share, increased sales, etc.
Advantages for Consignee
- The consignee has to pay for only those goods that are sold.
- The consignee sometimes doesn’t have to pay for some expenses if it agreed as per the agreement.
- If the consignee is well versed with the product, he may sell the goods faster thereby increasing his share of revenue.
- In the case of huge demand, he may earn higher revenue. As he need not incur any expense of the shipping also not to worry about the lead time.
Disadvantages of Consignment
Disadvantages for Consignor
- Since the consignee is not the owner and doesn’t face any monetary risk, he may not take this agreement seriously. Hence, he may not promote sales.
- Sometimes the consignor pays huge shipping charges by shipping a large amount of inventory instead of paying for smaller inventories to the consignee. However, the goods may or may not sell. So, if the goods don’t sell, he suffers a huge loss as he remains to be the owner and they still have to count it as a part of his cost assessment.
- The consignor has to keep waiting for the payment creating uncertainty in regards to when and how much will be receipt of the sales proceeds from the consignee. So, until there is a sale of all or some of the goods, the consignor has to wait for the payment leading to an imbalance in cash flows.
- If the consignor sells the product directly into the market, he may earn comparatively higher revenue by removing the excess profit margin of the consignee.
Disadvantages for Consignee
- If the consignee carries a bad reputation in a particular market, he may not be able to sell the goods so easily.
- The biggest con for the consignee is that he incurs a holding cost for that inventory either in his godown or in his store. That inventory may or may not sell. So, in the case of unsold goods, he suffers a loss.
- If the consignee repeatedly fails to sell the goods in time, he may either be discarded as an agent or would receive a lesser commission.
- If in the case of no sale of the goods and there is a possibility of it getting deteriorated, the consignee may have to buy them.