A consignment invoice is the document that a consignor delivers to a consignee when payment for consigned goods becomes due.
If that sounds confusing, you aren’t alone.
To better understand the meaning of a consignment invoice, and how you incorporate consignment invoices within your business, it helps to answer:
- What is consignment?
- How does consignment benefit your business?
- What is a consignment invoice, and what does it do?
- How do you use consignment invoices in your business?
Consignment is a commercial transaction between a buyer and seller. But, unlike an ordinary buy and sell, consignment changes some of the ground rules that typically exist when a buyer purchases goods from a seller.
To help illustrate consignment’s unique twist to the buyer-seller relationship, imagine a hypothetical antique retailer named Antweaks. Antweaks sells antiques of all kinds at its brick and mortar location. With inventory built from over 50 different antique suppliers, it’s large and always rotating, as should be expected from any antique store. However, Antweaks doesn’t own a single product in its inventory. How?
Take a look at how Antweaks uses a consignment model to build a solid antique inventory without ruining its cash flow.
What is consignment?
Consignment is a commercial transaction where a seller (the consignor) delivers goods to a buyer (the consignee), without payment due to the buyer until one of two events occurs:
- The buyer resells the goods to a customer, or
- The buyer uses the goods for itself
Antweaks is a reseller of antiques. It builds its inventory of antiques from many suppliers who transfer their products to Antweaks for display and sale in the Antweaks store. However, Antweaks doesn’t pay its suppliers for any of the antiques until Antweaks makes a sale to end customers. Antweaks’ network of suppliers are consignors to Antweaks, which is the consignee.
Until Antweaks makes a sale to one of its customers, it doesn’t actually own the antiques in its inventory. The suppliers maintain ownership of the antiques while they sit on display in the Antweaks store.
When a customer purchases an antique from Antweaks, Antweaks ensures two events occur:
- Ownership of the antique is transferred to the end customer
- The supplier is put on notice that the antique has been sold
Once Antweaks gives notice to the supplier that an antique has been sold, the supplier can generate a consignment invoice and deliver it to Antweaks. Once Antweaks receives the consignment invoice, Antweaks must pay for the products it has already sold.
This sets up the basic consignment relationship between a seller/consignor and buyer/consignee. Now, let’s evaluate some of the benefits to both parties of a consignment relationship.
How does consignment benefit your business?
The hallmark benefit of consignment to a company like Antweaks is consignment’s positive impact on cash flow. Because Antweaks buys inventory from over 50 suppliers, if Antweaks had to pay for an entire store’s worth of inventory before it could make any sales, it would constantly be strapped for cash.
Consignment allows businesses like Antweaks to acquire essential business assets without spending all of their cash or going into debt. Because Antweaks doesn’t pay for inventory, it can strategically spend money in other areas like marketing, employees and floorspace.
Other benefits to consignees arise from the consignor maintaining ownership. Because the consignor maintains ownership while in the consignee’s inventory, the consignor has the risk of loss.
Risk of loss is the legal answer to the question: who is responsible for the goods? Because inventory remains the property of the seller while it sits in the buyer’s store, the seller remains responsible for the goods.
If Antweaks’ roof leaks and damages some of its inventory, it’s actually the consignor of that inventory that writes the product off as a loss in its books. Antweaks has minimal risk of loss exposure because its suppliers maintain ownership until Antweaks delivers the product to the end customer, at which point risk of loss transfers to the customer.
Sounds to good to be true for Antweaks? It might be. There are some steps consignors can do to protect their risk of loss exposure while their goods are in a consignee’s possession. But, first, consider some benefits of consignment to a consignor.
While consignors must wait longer to get paid for products, consignors get the benefit of the consignees’ services. Consider the expenses Antweaks’ suppliers do not have because of the role Antweaks serves.
The suppliers don’t need to buy or rent retail space. They don’t need to hire retail sales personnel. They don’t need to spend on consumer-facing marketing. Most of the demand generation responsibilities lies with Antweaks. Driving demand is expensive, and many suppliers can justify delaying their cash in hand in exchange for offloading certain marketing and sales activities.
Can you change the ground rules to a consignment relationship?
Yes. The above overview describes the default relationship between a consignor and consignee. However, the parties may choose to negotiate certain terms to protect themselves against some of the risks associated with consignment.
These negotiated consignment terms are documented in a consignment agreement between the consignor and consignee. Typical terms included in a consignment agreement include:
- Risk of loss: While the default risk of loss remains with the owner (consignor), the parties can shift the responsibility to the consignee for certain reasons (e.g., if the consignee is negligent in storage of the consigned goods).
- Insurance: The consignor may require the consignee to maintain certain insurance coverage to protect its goods while they remain in control of the consignee.
- Storage requirements/duty of care: Because the consignor doesn’t control the goods it owns, it may require the consignee to agree to a certain duty of care to ensure the goods are stored and handled properly.
- Stock rotation/buy-out: Because the consignor doesn’t get paid until the consignee sells the goods to the end customer, the consignor may put a time limit on the amount of time the consignee has to sell its goods. At the end of the time period, the consignee has to return the goods to the consignor, or buy the goods for itself.
- Consignment invoice: The consignment invoice is the document that triggers payment due by the consignee. Because this document creates a payment responsibility, both parties have in interest in what information is required to create a consignment invoice, payment due date, who generates the form and when the consignment invoice is acceptable.
You may be wondering: if the consignor ships inventory in batches, but end customers buy one or two items at a time from the consignee, when does the consignee pay the consignor? Payment is due after the consignment invoice is delivered.
What is a consignment invoice, and what does it do?
A consignment invoice is the document that the consignor delivers to the consignee when payment becomes due. It serves the same purpose that any invoice does in a buyer-seller transaction. The difference between a consignment invoice and a traditional invoice is that a consignment invoice requires a triggering event and specific data.
The trigger event is the consignee’s sale of a good to an end customer. When Antweaks sells an antique to a customer, that is a triggering event. Antweaks now has a responsibility to its supplier. It has to give notice to the supplier that it has sold one of the supplier’s products. This notice allows the supplier to start the invoice process.
The notice must have the specific data that the parties have agreed is necessary to generate a consignment invoice. For example, Antweaks will likely need to tell the supplier the item number that it sold, the quantity it sold and the date of sale. With this information, the supplier can generate a consignment invoice so that Antweaks is only charged for the products it sold.
The triggering events and data requirements can vary depending on the consignment relationship. For example, the consignor may issue a consignment invoice once a month, but it may require the consignee to deliver weekly sales reports so the consignor can keep tabs on sales at the consignee level. These notice requirements, and consignment invoice specifics, will all be agreed to in the consignment agreement. Take a look at this template consignment invoice to get an idea of the basic information needed.
How do you use consignment invoices in your business?
If consignment fits your business—as a consignor or consignee—you need a policy around consignment invoices. At the very least, you need to utilize a consignment invoice template to ensure consistency across your consignment relationships.
Does a consignment invoice policy seem like overkill? It’s not. The policy doesn’t need to be long or complicated, but it needs to educate everyone in your business how to use consignment invoices in your business.
As a consignor, your policy should dictate what data is required from your consignees in order to generate accurate consignment invoices. Your policy should define the triggering events so that you business can forecast how quickly it will get paid after a consignee sells your products.
As a consignee, your policy should inform your business what terms your business is willing to accept in a consignment relationship. Will you buy extra insurance to cover consigned products? Will you accept some risk of loss? How soon after a triggering event can your business reasonably give notice of sale to the consignor? Will you accept a consignor’s template consignment invoice, or will you create your own?
These type of questions must be satisfactorily answered to the benefit of your business in order to successfully implement a consignment strategy.
Consignment is an alternative buyer-seller relationship that offers unique benefits to both buyers and sellers. Consider individual aspects of your business that might benefit from a consignment relationship, and start that conversation with the applicable business partner.