Honestly I think this is probably the most important article I’ve written to date. Please check it out and post questions/comments below.
When you are conducting business, it’s important to know how your money comes and goes. One of the things I keep my eye on is what percentage of my total business I do in barter. Exactly what the ideal percentage is will vary and could be a good topic for another article. What I want to concentrate on right now is how to put together an accurate calculation. What really matters is your percentage of profit that is cash vs. barter, not what your percentage of sales is.
Unfortunately I’ve been operating on incorrect figures in this area for years. In order to figure out how much cash profit and how much barter profit I made, I looked at the percentage of sales in the two areas first. For the purposes of this article let’s say I did 90% of my sales in cash and 10% in barter. I would then take my total profit and apply those same percentages to see how much cash profit I made and how much barter profit I made. There are two things that are very wrong with that calculation:
- Your profit margin for cash and barter may be different. Even when you are charging your clients the same either way (which is what you SHOULD ALWAYS DO) your margin could be different because (for example) it may be that you sell different products/services that have different profit margins to your cash and barter clients.
- As a general rule your expenses for both cash and barter sales are in cash. If you spent 100% barter to earn barter then your barter sales would not effect your cash profits, BUT BECAUSE YOU SPEND CASH to earn barter, for an accurate calculation of your cash and barter profits you need to adjust your cash profits down and your barter profits up.
That second item on my list here was difficult for me to wrap my brain around. Here are some numbers to help take this concept from abstract to concrete:
Cash sales = $900,000
Barter sales = $100,000
Total sales = $1,000,000
Just to keep this simple I’m going to keep the profit margin the same for cash and barter.
Total profit = $200,000
Profit margin (cash and barter) = $200,000/$1,000,000 = 20%
Unadjusted cash profit = $900,000 x 20% = $180,000
Unadjusted barter profit = $100,000 x 20% = $20,000
Again, just to keep things simple, let’s say that all expenses for cash and barter sales were paid in cash.
Cash expense for barter sales = $100,000 x 80% = $80,000
Next you adjust your cash and barter profit based on your freshly calculated cash expenses
Adjusted cash profit = $180,000 – $80,000 (cash expense for barter sales) = $100,000
Adjusted barter profit = $20,000 + $80,000 (cash expense for barter sales) = $100,000
Here’s the IMPORTANT PART…. although your sales were 90% cash and 10% barter your profits were 50% cash and 50% barter.