Calculating the "real" percentage of business you conduct in barter

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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:

  1. 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.
  2. 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.

It takes time to barter

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An important cost of barter that many people (including myself) forget to factor in is the time that I spend on it.  It takes a lot of time to put a deal together.  If you are like me, you’ve usually got 20 deals going at the same time so it really ads up.  Some of the things that I spend time on include:

  • Staying on top of what is available in my barter exchanges
  • Calling on folks in my barter network to put together deals
  • Posting to craigslist and following up on responses
  • Work to recruit new members into my barter exchanges
  • Work recruiting new direct barter partners
  • Time spent looking for good ways for my barter partners to spend credit they have with me
  • Extra book-keeping to keep the records straight
  • Ongoing help/training I give to everyone I ever talk to about barter

When recruiting a new barter partner I think it’s a good move to point out to the prospect that you are talking to that barter is not as simple as cash transactions.  They need to know that they will need to invest some time into barter in order to reap the rewards.  All of that being said, it truly is a labor of love for me.  <grin>  I’m a barter addict and it rare for me to resent the time I spend on it.

Don't demand your rights when you barter

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That sounds strange doesn’t it?  Why would I encourage you not to demand your rights?  This is America!  The land of rights and liberties!  Here’s where I am coming from:  Your goal with barter partners is to establish and maintain life-long relationships.  Generally speaking digging in your heals and demanding your rights is not a good way to encourage that.  I want to be my barter partner’s favorite business person.  Sometimes…that means overlooking where they may have fallen short of my expectations.  Don’t get me wrong here…I’m not advocating that you let yourself be used as a doormat.  What I’m saying is that I try to give my barter partners a little extra leeway with how they provide their services.  In the long run you more than make up for it simply because you are bartering with them instead of paying cash.  That being said, if you just plain get a bad deal, you can’t ignore that.  If a serious problem crops up talk to your barter partner and if you can’t work it out take it to your barter exchange (if you used one).  Your last resort is court, but I have to tell you that my experience has been that even when you win in court you lose when you consider your time and the chance that you won’t even collect what was awarded.  It’s much better to be a little flexible and get most of what you want than to fight tooth and nail for every scrap you deserve and ruin a relationship forever.

 

Barter and fundraising for non-profits

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I recently had a great experience doing some fundraising for my kid’s school that I wanted to share.  The school is putting together gift baskets that they are going to give away as prizes in a raffle.  I started calling my barter contacts to purchase items for the gift baskets.  I’d call and say something like: “I’d like to buy a gift certificate on barter for a school fund-raiser.”  The results were fantastic!  Not only did I get quite a few great items, but I also had folks offer to just donate the items outright.  I have to be honest;  as a small business person I don’t feel comfortable calling other small businesses and asking for donations.  To call and ask to purchase something and be offered a donation is tremendous.  If you have some credit in your barter account that you don’t already have earmarked, considering using it to help a non-profit this holiday season.

Best things to barter for

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What is your favorite thing to barter for?  Personally my favorites are:

  • Food (restaurants or groceries)
  • Staff for my business
  • Cleaning/Maintenance (house, yard, etc.)
  • Activities for my kids (karate, music lessons, camp, etc.)
  • Firearms

This important thing here isn’t actually what my particular favorites are, but WHY they are my favorites.  If we can figure that out we can hopefully help you to find new/better favorites for yourself.

Looking at this list there are a couple things that jump out at me:

  1. The top three are necessities.  I have to eat.  I have to staff my business.  I have to clean my house and mow my yard.  Anything that you HAVE to do are great things to barter for.  It stands to reason that if you don’t barter for them you will either have to pay cash for them or….. (shutter) do them yourself.
  2. Paying employees and contractors is a huge part of my businesses cash expenses.  Any time I can barter to have my bookwork done or have graphic design done for one of my client’s websites, it’s the same as putting cash in my pocket.  Please note that it’s perfectly legal to hire staff on barter.  You simply treat it like cash, doing withholding/taxes/workers-comp for employees and sending 1099’s to contractors.
  3. The top four items on the list are reoccurring.  My thinking is that any deal that is good once is even better more than once.  As such, setting up any trade that can be ongoing should be a top priority.  Let’s face it.  It can be a good chunk of work to put together a trade so you might as well set up a single deal that will result in multiple transactions.
  4. The last two items fall under an important category for me.  They are things that are not a necessity but are a lot of fun.  They are also notably things that I simply could not do if I was paying cash.  I think it’s important even when you are on a tight budget to find ways to have fun.  Barter enables me to do those fun things w/o blowing my cash budget.  Please note that it’s perfectly legal to barter for firearms.   You simply treat the transaction exactly the same way you would a cash transaction and follow all state/federal/local laws that are applicable.

Printing on Barter

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I have come to the conclusion that there are some print jobs that are good to do on barter and there are some that are not.  Because you can now order printing online so incredibly cheap I’ve decided that those “generic” print jobs that don’t really need any TLC, are best to do for cash with an online printer.  It’s so cheap to do it this way, there is no way a little local printer (one that is likely to barter with you) can compete with their prices.  With that in mind I recommend that letterhead, postcards, business cards, etc. be printed for cash with an online printer.  That is of course AFTER you hire a graphic designer on trade to put all the artwork together for you.

That being said, there is still a lot of room for barter in the printing world.  I would recommend you use barter to do more expensive, out of the ordinary jobs that require more service.  For example, I recently had 20,000 church bulletin shells printed by a printer on barter that needed a perforated tear-off section.  Not only did this mean that the printing was done locally, but it also meant it was a high service experience.  For example, when the printer had concerns that the glossy finish might give my church’s copy machine trouble, he drove over with some of the paper and did a test run to make sure everything would work before the print job was done.  It wasn’t necessary for this job, but bartering with a local printer would also allow you to do a press check at the time of printing.

Bottom line:  Pay cash for the easy print jobs online, and barter for the tough ones locally.  Also… I’m not necessarily recommending that you use vistaprint as your online printer.  I simply used their logo because they are one of the best known online printers.  Personally I have had good luck with www.americasprinter.com

The blessings of being a barter fanatic

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I’ve recently noticed that there is a double blessing in being a barter fanatic.  Of course the primary benefit is being able to trade with a bunch of folks for products/services that I probably couldn’t afford with cash.  The second benefit is that I can trade with them over a longer period of time because of my fanaticism.

As a barter fanatic I can’t help but talk to people about trade.  I talk to people I’ve just met about it and I talk to people I’ve know my whole life.  I talk to my wife.  I talk to my employees.  I’m sure there are a bunch of people who don’t figure I can even talk about anything else!  It also means that I talk to the people that I’m trading with about how great barter is.  It means I’m always talking to them about how to get the most out of barter.  I’m usually trying to give them ideas of how to use it to their best advantage.  I’m convinced that my enthusiasm and occasional wisdom have helped keep some of my trading partners bartering longer than they would have otherwise.  As we’ve discussed before, there is usually a limit to how much any company can barter.  Because of my fanaticism I have found that when I have a barter partner who needs to reduce their barter volume, I am usually the last person that they cut off from barter.

The take away is this:  Be enthusiastic about barter and try to help your trade partners be successful as well.  Do your best your barter vendor’s favorite client.  What comes around goes around.

Bartering for landscape maintenance or housekeeping

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Housekeeping and landscape maintenance are oft sought after services that (at first blush) seem like they should be easy to barter for, but are often tough to find.  There are a couple reasons for this.

1)  Most folks that barter much are small business people who are busy and own a home.   Although many of them wouldn’t/couldn’t spend cash on the luxury of hiring someone to help with housework, it is a PRIME service to hire on barter.  It’s a gift to yourself that you couldn’t justify in the cash world but many people don’t give it a second thought if they can barter for it.  So…the first reason it can be hard to barter for is that it’s something that many people want.

2) I have a theory about these two service industries.  The theory goes like this:  Businesses that do housekeeping and landscape maintenance usually fall into one of two categories.  The first category are those that are good and professional at what they do.  Those people usually seem SLAMMED with business.  I mean they are usually just buried.  Unfortunately it is often hard for them to justify doing business on barter.  They can get new cash clients any time they want, so why should they barter?  The second group of businesses are the flakes.  By that I mean, they do a marginal or poor job when they bother to even show up at all.  You don’t want those folks even if the service was free so they are not of any value in the barter world either.

So…what can we do about this?  If you are lucky enough to have someone good in a local barter exchange, grab them there and make sure you take great care of them!  If not, then start working on recruiting one yourself.  I have had some luck especially with start up businesses to do a little direct trade.  If they are open to more than one account on trade you can work on recruiting them into your barter exchange.  With the economy in the state that it’s in, there are more little start up service businesses than normal so ask around through your business/personal network and see if you can find someone looking to build their business who would be open to a little barter.

Fundraising with Barter

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I recently found a fantastic way to spend barter credits for those of you that are barter-spending-challenged.  I am on the school board for a small private school that is cash-poor but has several thousand dollars in barter credit.  When I found out that the school was planning a silent auction and raffle I immediately realized a great use for their barter credits.  I went out and bought many items on trade that they could include in the sale which effectively converted their barter to cash.  Items that I purchased that were particularly popular were a year’s supply of flowers from a local florist and a year’s supply of cookies from a local bakery.  We also had hard goods like jewelry and a nice keyboard.    For the service-oriented items like flowers and cookies, I made sure that we had a dozen cookies and a nice bouquet of flowers on the auction table so people could see what they were bidding on rather than just having a written description.  In the end the event was a success and cash was earned for the school.   Although I was spending credits that the school had on-hand, this would also be a great way to donate to any favorite cause.  If you know they are have a sale soon, let them know that you would like to donate an item and of course you can have a full tax write-off if the organization is a legitimate non-profit.

Bartering in a "sellers market"

As we all know business is effected by supply and demand.  When supply is high and demand is low you have a “buyer’s market.”  Prices are often low and moving inventory can be tough.  Barter is a great business strategy that can help get a business through those tough times.  Trading helps you move inventory even when your customers are unwilling to part with cash.  It can also help you get full value for your inventory in times when you have to discount to sell it for cash.

When something is in high demand and short supply that is a “sellers market.”  At those times sellers can usually charge a premium for the product/service.  It’s tough to barter in a seller’s market.  Any vendors that actually have the product that you are looking for can easily sell it for cash so there is no incentive to barter.  Twice recently I’ve had barter partners call me in situations like this.  First it was someone in New York that was looking to trade for a generator during the power outage from flooding.  More recently I’ve had a couple different potential barter partners looking for firearms since the tragedy in in Newtown.  In both cases, people were trying unsuccessfully to barter for something in a “sellers market.”

My advice in these situations is simply to avoid them.  Barter doesn’t work in a seller’s market so don’t beat yourself up over it.  The solution is simple:  barter for all the other things you need and use the cash you save to buy those items that are in high demand and short supply.