Know what barter really "costs."

Part of bartering effectively is knowing the value of what you are trading away and what you are trading for.  With that in mind it has come to my attention that it’s very likely that your barter profit margin is different than your cash profit margin.  Some barter brokers like to try to make it sound like barter dollars are free but for most traders this simply is not true.  Here’s a common calculation for cash profit margin:

(Cash Sales – Overhead – Cost of Goods Sold – Labor) / Sales = cash profit margin

Because barter is on top of my normal cash sales I look at overhead as a “sunk” expense that doesn’t contribute to my barter profit margin.  It’s all paid for by my cash sales and doesn’t need to be included in my barter costs.  If your labor is salaried or conducted personally in available time then the same could be true for labor.  That being said, my staff is hired hourly on a per project basis so personally I have to keep labor in the calculation.  Another difference between cash and barter profit margin is your barter commission.

“Cost of goods sold”  (COGS) for physical items is probably the trickiest expense to deal with.  If the product sold comes out of your normal product inventory then it clearly needs to be a barter expense.  The complication comes when you are bartering away non-standard  inventory (over-stock/breakage/liquidation/etc.) that is not part of your normal product inventory.  In that case you need to either include it in your cash overhead or as a barter expense, depending on which way you feel provides you with more meaningful accounting reports.  Although I personally lean toward counting this as a barter expense, if you are including all your overhead as a sunk cash expense as mentioned above, it’s probably more consistent to look at it as a sunk cash expense too.

So… with all that in mind here is a revised profit margin calculation adjusted for barter:

(Barter Sales – Cost of Goods Sold as appropriate – Labor that is specific to the transaction – barter commission) / Sales = barter profit margin

I suppose I shouldn’t wrap up this post without pointing out that I don’t have any formal accounting training.  Please comment back with any problems you see with my take on this subject.

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