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Profitable Times Newsletter

Consignment

The two big advantages of buying on consignment are the elimination of the need to finance inventory and the opportunity to test new, especially higher-priced products and works from new artists, with greatly reduced financial risk.

In a consignment arrangement the store buys products, often but not always original works of art, from an artist or wholesaler on a delayed payment basis. When the products are delivered to the store physical possession transfers but the products still belong to the artist and the store does not have to pay for them. It is customary to have the unsold product insured under the store's general insurance policy. When the product is sold the ownership of the goods is transferred to the customer, the customer pays the store and the store pays the artist. At no time does the store have ownership of consignment product.

Using this description of consignment, let's look at the similarity and differences between consignment and buying for resale.

Ownership

Under a consignment arrangement the store never owns the product. When buying for resale, the store is the owner of the product upon delivery regardless of when payment is made.

Merchandising Space

In either scenario the product takes up space and, as discussed later, this factor becomes a major consideration in determining the amount of consignment to carry.

Inventory Investment

Although similar to dating programs where the product does not have to be paid for until after the product will probably be sold, consignment products never have to be paid for until the product is sold.

Recording of Income and Expenses

The percentage of the sale retained by the store is recorded in income when the product is sold.

Inventory

Although actual practice varies, you typically do not include product you have on consignment in an inventory calculation. Most stores however, regularly check their inventory of consignment product against consignment records and always count the product when other storewide inventories are taken.

Some stores want to include consigned goods in inventory in order to keep track of the quantities on hand for each item in the store and calculate total inventory available for sale by department. Although point-of-sale (POS) systems handle this in many different ways, a common thread is to assign a retail price and cost of goods (the amount expected to be paid to the artist) to these products and put them into a Consigned Goods category that can be easily identified and extracted when necessary to analyze financial statements.

In summary, from the store's financial records standpoint:

  • When a product is received from the artist or wholesaler there is no entry.
  • Freight in is usually paid by the consignor, or it is hand-delivered, so this typically requires no entry.
  • When a sale is made the revenue is recorded and the payment to the consignor becomes a cost of goods sold.

With this background in mind, let's look at some specifics.

Income Statement

I enthusiastically advocate taking the time to breakdown the revenue and cost of goods sections of an income statement into the same product departments/categories. One of the categories in each section can be Consigned Goods. By doing so, the impact of each product department becomes very clear along with the totals for each of these sections of the statement.

With this information broken-out, individual departmental calculations such as cost of goods percentage, inventory turns, stock to sales and other ratios, dollars per square foot, etc., can be made by department and then amalgamated for the retail presence as a whole.

Open to Buy

Consignment does affect open to buy. Consigned product takes up space so you need to determine how much space you want to give it, or if it demands to make a merchandising statement, make the deduction from the space available for purchased products for which you calculate an open to buy.

You may also have an overall cost of goods percentage goal in mind that will be affected by how much consignment product is sold. Although payment to consignors varies widely, it typically is more from a percentage standpoint than the cost of goods of products for resale. For example, if your goal is to have an overall cost of goods of less than fifty percent, and you typically pay sixty percent to consignors, then you must find other product categories with lower costs of goods to counterbalance the consignment product, or reduce the quantity of consigned product or percentage paid to the artist.

Another factor affecting open to buy may be the availability of cash with which to make purchases. If budgetary restraints limit what you can purchase for resale, consignment, with its no cash up front characteristic, can become a more attractive alternative even if the final cost of goods may be higher.

Similar to the income statement, I encourage you to calculate separate open to buys for each product department including consigned goods and them amalgamate them into one, all-encompassing document. As with all your other departments, consignment will be affected by revenue and expense goals, the availability of space and all the other factors that affect your buying decisions.

 
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