The Benefits of Barter
With the recovery still going at a snail’s pace, it may not be a bad time to think about the advantages of barter for your business.
I love a good trade, probably because barter is in my blood. As this is written, my company just took in trade nearly $1000 worth of product. This was something we wanted, but didn’t have the discretionary money to buy. I calculate we paid about 33 cents on the dollar for it. The client obviously thinks it was a good trade for them, yoo, because we already have a second job.
My granddad, Jesse Miller, was a legendary horse trader. He was a young, single man in 1880 when, one Saturday, he saddled up a tall quarterhorse and headed out for a night on the town. His steed was a handsome stud colt he recently broke and wanted to show off, much like today’s young men cruise in their cars. As he passed by a neighbor’s place, he noticed the neighbor had a new buckboard wagon. “That would come in handy,” he said to himself.
Granddad completed the journey to town atop the buckboard, having traded his quarter horse for the wagon and a young fit workhorse. Later that evening, he met Florence, my grandmother, at a dance in town. After a few dances he asked if he could give her a ride home and she accepted. At the next break, he went outside and traded the buckboard and workhorse he had just acquired for very fine looking horse and carriage. From my perspective, granddad had a very successful evening of barter.
Cash is optional
With the recovery still going at a snail’s pace, it may not be a bad time to think about the advantages of barter for your own business. Even if you don’t have “two nickels to rub together,” you can trade your products or services to another company or individual who has something you need. Cash is optional.
Barter can be broken down into two categories: straight trade and indirect trade.
The oldest form of barter is a straight trade between two individuals. Each has what the other wants and wants what the other has. If the items or services are of equal value, they’re traded and no cash need change hands. This is my favorite, because it’s a continuation of the “horse trading” tradition.
The second type of trade is through a barter club or exchange. These are essentially commercial organizations that provide a mechanism for indirect trade. The key instrument is a token economy, which uses a currency of trade dollars exclusive to the exchange. You can sell to another member of the exchange for credits in this currency rather than dollars. These credits accrue in your account and can be used to buy from others in the exchange without ever engaging in a straight trade. The exchange manages all records and provides regular statements. The owners of the exchange make their money by charging a commission on each transaction.
Fortunately, wide-format digital printing is an ideal medium for barter. Almost every business needs what we make, so it isn’t too hard to find someone who is willing to trade. In fact, I’ve found that the offer to trade goods and services opens doors and can lead to a long-term paid relationship. Some excellent opportunities include improvements to your building, mechanical work on your company vehicles, office supplies, janitorial services, and even used equipment.
Our goods and services can be broken down into increments, so the value of what we offer has excellent variability. And some of what we do has significant profit margins, which give us the opportunity to receive excellent value in our trades. We also offer services like design and installation, where no material expense is involved. Often, you can work in the service during a slow time so that you’re getting value from workers who otherwise would be idle.
Bartering can also help with excess inventory or underutilized production capacity. The nice thing about targeting surplus materials for barter is that they probably are already paid for. And, as I indicated earlier, it can be a way of getting value from equipment and facility overhead and production workers when you don’t have enough to do.
Bartering and the IRS
Although some business owners fear that engaging in barter increases their chances to be audited, I’ve found that the IRS has well-established rules for barter and considers trade to be a normal business practice. The key to staying out of “IRS trouble” is to document everything and declare the goods and services you get in trade as income, and the goods and services you provide as expenses or capital expenditure. You must assess a fair-market value to the goods and services and account for them just like you would for cash transactions.
You’ll find that it’s typically easier to come up with the fair-market value of the product you’re receiving than it is the product you’re delivering. For products you’re receiving, one option is to simply use the trade invoice you receive to establish value.
For products you’re creating and delivering, you may have to verify the price to the IRS. When establishing the value of the product, be sure you take all the factors into consideration. If you only take into account the materials cost, for example, that may only represent about 25 percent of the value. Our company practices cost accounting, which allows us to account for labor byproduct as a load factor of total payroll and all employment-related costs; this load factor is broken into minutes. We also account for total overhead costs, which are calculated by item and based on timings and print and finishing method. All of these costs can be converted into square-foot cost and then worked back into the value of the product. Importantly, our accountant and tax attorney has blessed this method, and I strongly urge you to check with your own accountant/tax attorney when it comes to concerns such as these.
If you own the business and become involved in barter, you might find tempting opportunities to mix your business and personal finances. For example, you trade a vehicle wrap to an HVAC company for a new air conditioner for your home. We have found a satisfactory and legal procedure to accommodate this kind of barter, but your business structure and state laws may be different than ours—talk to your accountant or tax person about a business/personal trade.
Barter can also come in handy, by the way, when it comes to employee/subcontractor compensation or bonuses. Short of cash, there are excellent rewards that everyone seems to enjoy. For example, you might trade for movie or event tickets or gift cards for stores or restaurants. Just keep in mind that barter compensation, like cash, is subject to personal taxes for the recipient. You will need to declare these bonuses on the employees’ W-2s and include it on the subcontractor’s 1099.
The key to incorporating barter into a successful business plan is to integrate it into your sound accounting and business practices. If you embrace barter with enthusiasm, it can become a way to not only even out the ups and downs of sales and production and acquire goods and services at reduced cost, but also expand your business.
Craig Miller is president of Pictographics (www.pictographics.net) in Las Vegas, a large-format-graphics service bureau that excels in digitally dyed textiles, wall coverings, and custom applications.