I’ve often heard the complaint from unsuccessful traders that they can’t pay some of their most important expenses on barter.  If your business is anything like mine, a major expense is payroll and this article is about how I’ve lowered my payroll liability by hiring staff on barter.

The basics:
There are a few basics about hiring on barter that I should get out of the way right off.  Firstly, you of course are still responsible for all taxes, workers comp, and withholding just like you would a cash employee.  Also, in most cases it isn’t practical to try to hire full time staff on barter.  As much as I love barter, I can’t live off it 100% and that’s true for your staff too.  Lastly (and you probably already know this) it’s a pretty tough proposition to switch cash staff over to barter.

So that’s all the negative news; here’s the good news.  It can be very easy to hire new part time staff on barter.  The easiest way to do this is simply to find sub-contractors that can fulfill a needed position in your business that are already in your local barter exchange.  This is exactly how I hired my book-keeper.  He comes in for about 3 hours a week and does all our books.  I’ve never paid him a cent in cash.  Sub-contractors are also easy because you don’t have to worry about taxes/workers comp/etc.

I’ve also hired traditional employees on barter.  When I’ve done that I’ve usually found the employee by posting in the barter section of craigslist.  As I mentioned it needs to be a part time position.  I then pay all taxes/withholding etc in cash, but the net pay is paid in barter.  I have given the staff member the choice of receiving credit in a barter exchange account or having me carry the balance for them so they can use the credit throughout my entire barter network (of multiple exchanges and direct trade partners).  The key to it is that it always has to be a win-win for everyone.  If it’s not a good deal for your employee, then they will not stick around.

I spoke to a barter partner recently who said he was having a hard time finding smart things for him to spend his barter credits on.  He belongs to a good national barter exchange that has many vendors that are local to him because they have an office in the same town as his office.  I belong to the same exchange and spend thousands of dollars wisely each month.  So…..it got me thinking….what can he do that he isn’t doing now?  I came up with two answers:

1. Switch Vendors
   When you already have a vendor in place to provide you with a particular product or service, there is a lot of resistance to switching.  That being said, in order to get the most out of bartering, you have to actually spend barter credits.  That means that you have to at least consider switching from cash vendors that you know and love to unknown barter vendors.  It’s a bummer to say goodbye to trusted suppliers but the pay-off can be huge.  A couple examples that I can think of that were particularly difficult for me was our dentist and someone who helped with house-keeping.  When we failed to get either of them to barter with us, we decided that we had to at least try vendors that would barter.  Both of the new relationships ended up going well and of course we are now saving all of the cash that we were formerly spending.
2. Recruit New Parter Partners
   Another area that has helped me spend barter credits is to recruit new barter partners.  Don’t be satisfied with simply looking at the list of vendors that already belong to your barter exchange.  Choose a particular product/service that you would like to barter for, find some prospective bartering partners and make the pitch.  The beautiful thing about pitching barter is that it is usually very easy to explain that it is a win-win proposition.  Don’t be nervous about suggesting barter.  Many accomplished business people love to barter

Also, don’t forget to apply these two principles to personal expenses also.

One of the common complaints that I run into with unsuccessful barter exchange members is that other members  price gauge.  Honestly, it’s a complaint I make myself sometimes too.  I think there are a couple reasons why this problem can crop up.

1)  It’s not fair to compare the best possible cash price to the barter price.  In general it’s an unwritten rule that everyone charges their full retail price in barter.  I think it’s totally reasonable to charge MSRP for barter goods even if you NEVER sell at MSRP for cash.  All sales or discounts should also be ignored when selling a product/service for barter.  This is true both when you sell your product/service and when you buy a product/service on barter so that price increase should cancel itself out when you take into account your own barter prices. With this in mind, you shouldn’t try to compare the barter price to a sale price, a big-box-store price, a price on craig’s list or a price on ebay.  Make sense?  You are GOING to pay more on barter, but of course, you are still earning barter credits at your wholesale rate so you should still be well ahead of the game.  Plus this can help recruit new barter partners.  When I’m talking to someone who is new to barter I will almost always tell them I can “pay high retail” or  MSRP if it’s on trade.

2)  Some vendors really and truly do over-price their services on barter.  I had a plumber over a couple weeks ago to fix a leaking sink.  When it was all said and done he left with over $600 in barter credits for about an hour’s worth of work.  I was blown away.  The truth of the matter was that I didn’t have the cash to pay a plumber to do this work even at a reasonable rate and I didn’t have time to do it myself, so I was stuck and just didn’t have any choice this time.  That being said, you better believe that I will NEVER call this vendor again.  I will also tell anyone I know (both in the barter and cash world) that I would never use this vendor.  As a matter of fact, within a week of this happening, my neighbor called and asked me if I knew of a good plumber (for a cash job) and I told him NOT to use this vendor.  The lesson to me was to be especially careful with tradesmen on barter and to get an estimate if I can on the phone before they even come out to my house.  The other lesson is actually for this vendor:  If you rip someone off on barter, it will effect your business reputation in the cash world.

3) Some vendors seem to think that it’s OK to price gauge simply because they think their cash costs are higher than most.  Sorry.  I don’t buy that.  If there isn’t enough of a margin on a product/service to barter profitably at reasonable prices, then you shouldn’t barter that product/service.  Period.  Exactly the same rule applies to the cash world.

4)  I think one of the reasons that some vendor’s price gouge is simply that they can.  Some products/services are in high demand and they regularly get away with super-high rates.  If you are dealing with a devalued barter currency and can earn it really cheaply then I could see over-paying to get something in high demand.  Other than that… forget it.  Do your homework and keep walking if the price is too high.

Try not to take over-pricing personally.  Generally speaking, vendors with really high prices aren’t doing it just to you.  They are trying to hit everybody.  I don’t understand moral outrage at high prices.  If someone’s price is too high I just keep looking elsewhere.

For the haggling-challenged there are a few types of trades where you are pretty much guaranteed a reasonable price: Restaurants and retail stores.  On both of these types of traders you purchase from a printed menu or a pre-marked price and you should feel safe that you are paying the same as a cash customer.

Bottom line:  Don’t let the folks that over-price their goods/services ruin barter for you.  Barter is too great to let things like this get in your way.  Know the value of your barter credits and the value of what you want to trade for.  Take the good deals and reject the bad ones.  It’s that simple.

A big part of successful bartering is your ability to recruit new barter partners.  If I only traded with existing members of my barter exchanges I would be bartering a lot less (more about barter exchanges).  I decide what product/service I need, then go check out my existing exchanges.  If they don’t have what I want, then I strike out on my own starting out with CraigsList and expanding my search from there.  Often times when I find a new potential barter partner, I try to recruit them into one of my barter exchanges.  I have no problem with trading direct, but there are a lot of limiting factors with direct trade that barter exchanges can remove.  It came to my attention a while back that there are simply some industries that my exchanges have no interest in.  This post is to help you understand why some businesses are more attractive than others to exchanges and what you can do about it.

There are a couple different spins on why an exchange may not want a new member but they all come back to money.  Specifically it has to do with the exchange’s estimate as to how much volume they will most likely be able to trade.  An exchange has to put resources into adding new members so it simply is not profitable for them to sign up a lot of members that aren’t trading.  I spoke to an exchange recently that told me they really try to avoid signing anyone up that they don’t think can earn/spend a minimum of $3,000 to $4,000 annually.  I’m in California so that number may be lower in some less expensive parts of the country.

Here are some common reasons for not signing up a potential member:

1. Based on past experience, an exchange may simply close particular industries because they have been low volume in the past.  They may have tried multiple times with this industry and found it unprofitable.
2. The exchange may already have another member in the same industry as the potential member and the exchange may not feel that there is enough business to support multiple members in the same category.
3. An exchange may think that some industries are simply more trouble than they are worth.  This could mean that there are industries that generate a lot of complaints and are big eaters of time and resources for the exchange.   A perfectly legal industry that I’ve noticed exchanges shy away from is firearms.  I’ve bartered for firearms directly many times without a hitch but (especially out here in California) I think it’s viewed as an industry that will create paperwork/legal headaches for exchanges.  I’ll come back and post another article later about why this is totally wrong and exchanges should allow barter for firearms.

So….as an exchange member who has a new potential barter partner that you want to join your exchange, what can you do about this?  Here is my advice:

1. Check with your exchange before you put a lot of resources into recruiting a new member.  If you know you are going to have to barter direct with with this new partner, it’s better to know that earlier rather than after you’ve told them how wonderful your exchange is.
2. You’re more likely to talk your exchange into accepting the new member if they sell a product/service that can be provided/shipped nation wide.  That way you can explain that it’s not a problem that they have another local vendor in the same industry.
3. The best way to talk your exchange into accepting a new member that they feel is borderline is to tell them that you will be using the vendor a lot.  A while back I recruited my kid’s martial arts dojo into my exchange.  They already had another dojo in the exchange and I think they were unsure as to how much business the new member might get.  When I told the exchange that I’d be paying for all three of  my kids to go on an ongoing basis, that made all the difference.

Bottom line here is that sometimes you have to exercise some salesmanship, not only on a vendor that you’d like to barter with but also your exchange.  You won’t win every time but the more you understand the dynamics the better chance you have.

In our last article we talked about many reasons mixing barter and cash can be a bad idea.  That being said, there are some situations where it makes sense to make hybrid barter/cash deals.  Here are some that make sense to me:

1. Taxes/tips/shipping etc.
   This doesn’t need any explanation does it?
2. Using barter to get a new cash client
   I’ve had a bunch of times where I’m cold calling a potential client and I use barter as a really good differentiator to win the project.  For example,  I may be calling on a potential client for cash business and as an added bonus I will say: “If you want I can accept some of the payment in trade for your product/service.”  This approach has worked successfully for me on multiple occasions.  The ultimate goal was to win a new cash client but taking part of the payment in trade in order to sweeten the deal made the difference.  I then do part of the job in trade and bill cash for the rest.  Of course, you can only do this when the product/service that the potential client deals in has value to you.  Obviously this only applies to potential clients that are not in your barter exchange.
3. When a long-term cash client is a member of your barter exchange
   I have only had this happen once, but seeing that it happened to me, it could happen to you.  I had an existing cash client that I’d been doing business with for years.  When I joined a barter exchange I found out after the fact that this existing client was in the same exchange.  After a while he realized this also and approached me about switching from cash to barter.  Now as much as I like barter, I would ALWAYS rather have cash so the last thing I want to do is switch existing cash clients over to barter.  Seeing that he was a cash client of mine long before I ever even knew that barter exchanges even existed, I would have been well within my rights to refuse his request outright.  That being said, that approach would not have done much to encourage our ongoing relationship.  Honestly I felt a little trapped and even though I didn’t have to start bartering with him, I felt like I had to do something or else it would appear that I had no interest in my client’s best interests.  So…I struck a deal to switch him over to a 50/50 cash/barter deal.  That way I’m still getting a good chunk of cash, but I showed a lot of “good faith” to the client.
4. On larger trades with barter currencies that are not in demand
   This last example is actually a deal I’m working on right now.  A potential client approached me through one of my barter exchanges.  I currently have more credits than I need with this particular exchange so I was politely turning this person  away.  In the course of the conversation, the prospect asked if I was interested in the job if he paid me 50% in cash.  Most exchanges do not allow this type of deal so without thinking I turned him down on this offer also.  After hanging up the phone I remembered that this particular exchange only requires that the first $3,000 of a trade be barter and after than it can be cash.  Seeing that the whole project was around $6,000 the exchange would allow for a 50/50 deal.  I immediately called him back and we’re working on putting together a deal now.  I don’t really need more credits with this exchange right now but if I’m getting 50% cash it’s a viable deal for me anyway.

Fairly often when trying to make a trade someone will suggest that we make the trade 50% barter and 50% cash.  In this article we’re going to explore why this comes up, if it’s a good idea, and how to respond.

The most common reason that a 50/50 trade is suggested is that the vendor you are talking to says that they need to cover their cash costs.  When working through a barter exchange  I think this is a totally bogus excuse because everybody (including you) needs to cover their cash costs.  That’s why you have cash customers.  When I am bartering through an exchange I eat my cash costs when I earn credits and I expect my bartering partners to eat their cash costs when I spend my credits.  Fair is fair.  Often I also run into specific industries that claim that their cash expenses are higher than others, which justifies their asking for cash.  This doesn’t hold any water with me either:  If their cash costs are really that high then they should not barter that particular product or service.  It is simply not equitable for some people to charge cash when they earn barter credits and then spend 100% barter when they make purchases.

The problem with a 50/50 cash barter scenario is that it greatly reduces the value of barter.  By 50% to be exact.  Let’s say you are earning barter credits and your profit margin is 50%.  By the time you pay your commissions on barter let’s say you have a 40% profit margin.  So that means that when you purchase on barter you are getting a significant 40% discount.  Of course the argument could be made that barter prices are pretty high which would further dwindle that discount rate.  Now, if you make a deal on 50% cash, your discount just dropped to 20% or less.  Certainly 20% is better than nothing however when you add in the extra work that it is to barter over a cash transaction and the reduced purchasing options, it’s really starting to not look like such a great deal.

Here’s another thought:  What if everyone charged 50% cash?  All you would be doing is reducing the savings that you get with barter by 50%.  Think about it…it’s nice to receive 50% cash for everything you sell, but what if you had to pay 50% for every time you purchase? Not only would it make barter less valuable to you, it would make barter less valuable to everyone and very soon you would start receiving less new business through the barter system.

When you are working through a barter exchange on a fairly small transaction and someone suggests 50% cash, my advice is to play hard ball and say that you can only make the deal at 100% barter.  Honestly, I’d rather pay 100% cash to a different vendor that has my best interests in mind.  I can usually find a lower price for cash anyway.  I also usually let my broker know what happened so they know what’s going on too.

Next time:  It’s not all bad.  There are some times when a partial cash deal can make sense and is a win/win for all parties.   We’ll explore that in the next article.

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.

Short version:
It is good to spend barter credits on personal expenses.

Long version:
I’ve run into a couple of traders who have set up rules for themselves that keep them from ever fully realizing their best possible return on barter.  These people are generally conservative in nature and in their zeal to make sure they don’t “waste” their credits on frivolity, have decided that they will never spend barter credits on personal expenses.  For some this is just an out-cropping of self-discipline gone wrong, but others actually believe that there is a legitimate business reason to avoid personal spending on barter.

When you accept payment in cash in your business, you take some portion of that cash and spend it on personal expenses.  Realize it or not, it is something every profitable business does.  Obviously you will have some book-keeping problems if you start paying for personal expenses directly out of your business account which is why most folks draw cash out of their business in the form of payroll, owners-draw, dividends, etc.  These funds are pulled out of your business, you are appropriately taxed on the funds as personal income, then you spend the money on personal expenses.  Barter is no different!  You can pay yourself in barter credits rather than cash, then turn around and spend those barter credits on personal expenses.  There is nothing to it!  It doesn’t matter if you are a sole proprietorship, llc, or some type of corporation.

The advantage in spending barter credits on personal expenses is that it opens up more opportunities to spend barter credits wisely.  It totally baffles me that a business owner would sit on thousands of dollars of barter credits, yet still pay cash for dental work or carpet cleaning in their home.    By paying yourself (in part) in barter credits that you use for personal expenses, you free up cash in your business that can be used EITHER for cash business expenses that you can’t trade for, OR EVEN BETTER, cash profit payouts to yourself.  Either way you win.

A final passing thought:  Just because I’m saying it’s good to spend barter credits on personal expenses doesn’t mean that I’m indicating to spend frivolously.  All the normal rules of wise purchasing still apply.  I’m just saying there is nothing inherently bad about using barter credits for personal expenses.

As I continue to develop my barter strategy I’m beginning to see my purchases fall into a handful of categories.  Where your barter purchases fall into these categories in a large part determines how successful your barter effort is over all.  Additionally, I think looking at these categories can help traders find more trades that help their bottom line.  In my opinion trade purchases fall into three categories:  Cash Replacement, Value Added, and Luxury Purchases.

Cash Replacement Purchases
These are the absolute best kind of trade.  This is when you trade for something that you would have bought for cash.  Personal examples of things that I trade for in this category include food, dentistry, automotive repair, etc. .  These trades represent a direct conversion from barter dollars to real dollars assuming that you purchase these goods/services at comparable prices to cash prices.  If you are looking to get the absolute most out of barter, dig through your checkbook and credit card statements looking for things that you can switch over to barter.

Added Value Purchases
This one is the hardest one to grasp of the three categories and I’m only now realizing the value of this group.  Purchases in this group are items that you would not have purchased for cash, but they still represent significant real value to you because they free your time for family or cash generating work.  Of all things of course time is one of the most limited and I’ve met few productive people who aren’t interested in freeing up more time.  Examples of these types of trades would be hiring a landscaper, book-keeper or even a house-keeper.  I like doing my own yard-work and I would never hire someone for cash to do it for me.  That being said, I am willing to hire someone on barter that will do a better job than I do and it will free up time for me to work or play.  The same thing applies to book-keeping.  My wife enjoys doing our books, and was very resistant to the idea of hiring a book-keeper.  She was more open to bartering for one and now that we’ve made this switch she is extremely happy with it and uses that time very efficiently in other areas of her life.  Although this kind of a trade does not generate a direct conversion of barter dollars to real dollars, it has a very real positive effect on your business and personal life and is a good area to spend barter credits.

Luxury Purchases
This is the one to be careful with.  They are purchases that are totally for fun that you would not have made for cash.  Certainly I would be the last person to tell you that you shouldn’t spend barter credits on yourself for fun (check on the barter vacation I bragged about), however I know that some people go over-board in this area.  My only comment on this area is that you don’t want to make so many luxury purchases that you don’t have credits available for making the other two types of purchases described above.

It’s worth mentioning that some folks are so against luxury purchases that they don’t believe you should make any personal purchases at all.  This is totally incorrect in my opinion and I will write more on this topic later.  For now suffice it to say that you should make as many “cash replacement” trades  as possible regardless if these purchases are business or personal.

So….take a look at how you conduct your trades and see where your purchases fall into these categories and start making some changes as you see fit.