What is a consignment?

Imagine you run a small store and a supplier suggests: "I will leave my products on your shelves at no upfront cost; you only pay me when you sell them." In return, he trusts you to take care of his merchandise. That arrangement, far more common than it seems, has a name: consignment. A consignment is a commercial agreement in which a person or company, called the consignor, delivers merchandise to another party, called the consignee, to sell it to end customers. The consignee does not buy the products: they simply receive them, display them and sell them, paying the consignor the agreed value minus their commission or margin when a sale happens. What does not sell can be returned, exchanged for other items or kept for an additional period, as agreed. This model is common in clothing stores, pharmacies, stationery shops, hardware stores and in the sale of handmade or seasonal products. For it to work well, three things must be perfectly clear: who owns the merchandise, who is accountable for it and how every movement is recorded.

The golden rule: you only pay for what sells

The feature that defines consignment is that the consignee pays only for the merchandise they manage to sell. If they receive 20 units of a product and sell 12, they settle 12; the remaining 8 can be returned to the consignor, swapped for other items or kept in the store to try selling later, as agreed. Ownership of the merchandise remains with the consignor while the products stay in the consignee's business: the risk that they will not sell is not borne by the party displaying them, but by the party that made or distributed them. That is why the products, quantities, prices, commission, time frames and what to do with returns should be agreed in writing: a verbal agreement works until a disagreement appears.

Consignor and consignee: who is who

Every consignment operation involves two clearly defined parties:

Consignor: the owner of the merchandise. They can be a manufacturer, an importer, a wholesaler or even a small producer. They deliver their products without charging upfront and expect to be paid for what sells within the agreed time frames.
Consignee: the party that receives the merchandise to sell it. This is usually a merchant, a shop or a store with a point of sale. They do not buy the products, but they commit to displaying them, taking care of them, selling them and reporting results.

Trust is essential between both parties, and so is a clear record of what was delivered: many conflicts are not born from bad faith, but from the fact that nobody wrote down how many units were received or on which date.

How a consignment business works, step by step

To understand the full model, let us look at the typical journey of a consignment operation:

Agreeing on the terms: consignor and consignee settle the products, quantities, prices, commission, time frames and how payments will be made, ideally in writing.
Delivering the merchandise: the products are handed over and both parties record the quantity, date and condition of each item on a delivery receipt.
Displaying and selling: the consignee places the merchandise in their store and offers it to customers at the agreed price.
Recording sales: every sale is logged immediately with product, quantity, price and date, so the exact amount owed is always known.
Settling up: on the agreed date, the consignee pays the consignor the value of what was sold, minus the agreed commission or margin.
Returns and adjustments: unsold merchandise is returned, exchanged for other products or given an extended deadline, as agreed.

When the flow is steady, the most practical approach is to agree on periodic deliveries and monthly reconciliations so that neither side loses track.

Advantages of consignment for both parties

Why choose this model when you could simply buy and sell? Because consignment offers real benefits on both sides of the counter.

For the consignor: they place their products in more points of sale without investing in their own stores; their merchandise gains visibility with customers who did not know the brand; they keep ownership until it sells; and they receive valuable information about which items have real demand.
For the consignee: they expand their assortment without spending capital or taking credit; they reduce the risk of being stuck with dead inventory; and they can test new products or brands without committing to buying them.

The model also demands patience: the consignor waits for their payment and absorbs the cost of products that do not move, while the consignee takes care of someone else's merchandise as if it were their own and reports every sale accurately.

Consignment versus traditional sale: key differences

The essential difference lies in who owns the merchandise and who bears the risk that it will not sell. In a traditional sale, the buyer takes ownership on receiving the products, pays for them and assumes all the risk; in consignment, the business receiving the merchandise never buys it: it only manages and sells it on behalf of the owner.

Aspect	Traditional sale	Consignment
Ownership transfer	Immediate upon receiving the merchandise	Only when sold to the end customer
Payment for the merchandise	Cash or credit upon receipt	Only for what is sold
Risk that it will not sell	Borne by the buyer	Borne by the consignor
Return of unsold items	Not applicable in most cases	Yes, as agreed

Neither model is better in absolute terms: a traditional sale gives immediate cash flow, while consignment lets a business grow its assortment with less risk. Many companies combine both models.

Inventory in consignment: the merchandise does not belong to the one holding it

This point often confuses people, but it is the key to the agreement: merchandise received on consignment is not part of the consignee's own inventory. Even though it sits physically on their shelves, its owner is still the consignor, so it is wise to separate your own inventory from third-party inventory in the records: mixing them distorts the value of the business and inflates its assets. The distinction also defines responsibilities: the consignee is accountable for safeguarding the merchandise, and if it is damaged, lost or sold without being reported, they must replace it or pay for it. The consignor, who owns goods located outside their warehouse, needs to know at all times where their merchandise is and how much is owed to them.

How to control inventory in consignment

Controlling consignment merchandise relies on three records, kept in an orderly way and with dates:

Delivery records: every time merchandise arrives from the consignor, the product, quantity, date, unit value and the signatures of the person delivering and receiving are noted.
Sales records: every sale of consignment merchandise is logged immediately with product, quantity, price and date.
Return records: when merchandise is returned to the consignor or exchanged for other products, that is documented too, so the balances add up.

With those three data sets, the balance is calculated like this: balance to sell = units delivered minus units sold minus units returned. It is also wise to run periodic reconciliations with each consignor and to count the merchandise from time to time, to confirm that the records match what is actually on the shelves.

A practical example with numbers

Suppose a small maker of handmade candles delivers three products to a gift shop on consignment for one month. This is the state of the agreement at settlement time:

Product	Delivered	Sold	Returned	Balance to sell
Scented candle, medium	24	18	4	2
Citronella candle	12	9	3	0
Room diffuser	10	6	2	2

At the end of the month, the shop settles with the maker for the 33 units sold and deducts its commission; the 9 returned units go back to the maker, and the 4 remaining units can stay for another period or be returned. The table is checked against the records: if the maker says they left 24 scented candles and the shop reports 18 sold and 4 returned, 2 are missing, and the pending balance proves it instantly. That is the value of keeping records up to date: no number is left to memory.

Conclusion: consignment works when the records exist

Consignment is a powerful strategy to grow without risking capital, but it only pays off if both parties record every movement with discipline. With several consignors and settlements every week, manual control is no longer enough: you need a system that distinguishes your own merchandise from goods received on consignment, records deliveries, sales and returns, and tells you in seconds how much you owe each consignor or how much they owe you. Tools such as Kardex Tauro include a loans and consignments module precisely for that: to grow with this model without ever losing track of a single product.

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