Today the barter system can be used in a much more sophisticated way than ever before yet it carries with it the same basic motivation – the need for something that you don’t have and the excess of something that someone else wants. Using barter exchange business or a commerce network to negotiate for what you are looking for with what you can provide can help in many ways.

•    Conserves cash: Liquidity or cash is very important in a monetary economy. When you use barter your goods or services replace cash and become your biggest asset. Suddenly your purchasing power is no longer limited to how much cash you have in the bank. Instead you are buying based on your potential to make new income – not your historic sales. You can barter to get advertising, supplies, or even to pay for services like accounting or taxation. Remember: a shortage of cash is not an unusual situation and is never anything to be ashamed of. Bartering provides a way for you to continue to exchange something of value (a service or product) for what you need.

•    Helps create new customers: Not only does bartering conserve cash, but it can actually generate sales and profits as it helps you get new customers. In a barter exchange both parties make a sale to someone they wouldn’t normally have considered a customer. So, barter helps you reach to a larger customer base, create word-of mouth referrals from your newly satisfied customers and to provide you with a greater market penetration for your product or service.

•    Bartering can help you get equity stakes: bartering for equity stakes in other businesses can be done by small and large businesses alike. If you are a start-up then you can offer shares in return for advertising, accounting services, office space, equipment or professional services. If you are a business with excess capacity you may like to invest this into a new enterprise and retrieve a return on your investment in the forms of cash dividends or eventual sale of your shares.

•    Helps use unused resources: bartering helps you ensure that all your resources and services are being utilized to their full potential. Many times you may not realize it but there is potential in your business to grow.

•    Mutual benefit: barter deals are mutually advantageous. Neither party has to part with much of their hard-earned cash to obtain the desired goods or services. Not only does bartering conserve cash, but it can actually generate sales and profits for both businesses involved. The barter model of business is based on cooperation rather than competition.

•    No effect of recession: Barter remains unaffected during inflation. In many economies of the world during economic crisis barter replaces money as the method of exchange, when the currency is unstable and devalued by hyperinflation.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au

Bartering is a medium of trade in which goods and services are directly exchanged for other goods and services and the use of barter is not limited to individuals alone. Small, medium and large businesses, multinational corporations and even national governments are involved in barter trade on a day-to-day basis. In fact, the US Department of Commerce and the GATT both estimate that barter accounts for between 25% – 30% of all transactions world-wide.

History
During ancient times people were unable to buy goods from other people with money. There was no money. They used barter. Barter was the exchange of personal possessions for other goods that people wanted. This kind of exchange started at the beginning of humankind and is still used today. From 9,000-6,000 B.C., livestock was often used as a unit of exchange. Later, as agriculture developed, people used crops for barter. For example, I could ask another farmer to trade a pound of peaches for a pound of bananas or apples.

Slowly the disadvantages of the system were realized and money replaced barter.

Disadvantages of Barter

The lack of double coincidence of wants: Barter depends on the coincidence of wants. If you have bananas and want to trade or barter them for apples you have to find someone who has apples and is willing to trade them with bananas. This was not always possible.

Lack of common measures: there are not fixed measure for trading equipment. A liter of milk might not have the same value as one dozen of bananas or a pound of cement or one hour of work on a farm. So there was no system to keep a measure and so one or another party may suffer.

Lack of divisibility: imagine you need wheat, cotton and rice and have a horse to trade. It’s not necessary that you will be able to find one person with all the three commodities. But you only have one horse to trade that you can’t divide in three.

Barter Networks and problems of barter
With the presence of barter networks today the disadvantages of barter have been resolved. These organisations use the latest software and technology to make barter transactions very similar to those of money – with the added benefit that when money is in short supply you can still buy and sell what you need.

A barter exchange acts as a marketplace and a record keeper for barter deals and solves the problem of lack of double coincidence of wants, lack of common measures and lack of divisibility. They provide opportunities of multilateral barter which helps clears the issue of finding someone to directly trade with. They use barter dollars as a measure and hence the problem of a common measure and lack of divisibility are resolved.

Rather than being limited to one-on-one trading, the network opens up possibilities to trade with more than one business, or, to sell to one business and use the value of that sale to buy from another. The exchange itself organizes three, four and multi-way transactions to ensure that there is a balance in the system. For the user, however, it is very much akin to using cash – except, of course, that the barter exchange helps find you both customers and new suppliers, and often at a lower cost than you would incur doing it yourself.

Modern barter networks have resolved the problems and disadvantages of the traditional barter setup and made it a modern day concept.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au

What if you came up with a way to ensure that all your debtors do pay their debts?

What if there were some creative ways in which you can ensure that you collect bad debts and save your money as well as the debtor?

More often than not a debtors does wish to pay back their debt but may lack the funds to do so. Chasing anyone through the legal system is both time-consuming and costly and there are no guarantees that you will get paid, especially if you are not the preferential creditor.
If the a creditor can come up with some alternate way to collect a debt then they will not just save themselves time and money but it will also help maintain the relationship between businesses. Some creative and new ways to collect bad debt are listed below:

Encourage them to work on a payment plan: If the business that owes you a debt cannot pay all at a time, work out a payment plan with them. Formulate an easy plan that depends on their ability to pay. Getting payment in small amounts eventually is better then waiting forever for a large sum to be paid back that might never be paid.

Help sell their products for them and take a portion of the sale price: As you already have an established business and reputation you can help your debtor to improve their business. Consider advertising their product or service to your customers. This way their sales will increase and you can fix a part of sales as a payment on the debt.

Take their products directly off them: You can also consider taking their products directly from them. For example, if your debtor is a furniture seller, collect their furniture in amount for your debt and sell, or barter, it to get what you need.

Get them to join a barter exchange: Encourage your debtor to join a barter or commerce network that will sell their product or service for them and give you barter credits. You can then use these barter credits to buy things YOU need – just like cash.

These methods can save you money and save the debtor. It saves you collection fees and time and saves the person who owes you money because it brings them new customers and helps support their business. Rather than try and “kill them” and maybe get nothing [because there may be other creditors] you can work with them to grow their business by encouraging new customers to go there. Always remember what the Roman playwright and philosopher said ‘He that does good to another does good also to himself.’

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au

A fine example of barter is the Swiss WIR. So, what is WIR? The WIR bank is the oldest, still existing, formal, business to business barter network in the world and has been operating in Switzerland since 1934. WIR is an abbreviation for Wirtschaftsring and represents the Swiss Economic Circle.

The Beginning.

Today WIR is the oldest and most successful economic network in the world. However, its beginning was a result of the economic difficulties and currency shortage after the World War I. The stock market crash of 1929 had left businesses seeking and devastated. In this era of chaos two businessmen, Werner Zimmermann and Paul Enz influenced by German libertarian economist, Silvio Gesell founded the WIR.

The Difficulties.
Like every enterprise the WIR had to go through its share of difficulties and problems. Inflation and the discount trade of barter currency were amongst the main problems that the WIR suffered. This almost destroyed the system, however, WIR survived because of the foresight and determination of a small group of people who were successful in bringing about two major changes:

The “rehabilitation” of the system which included a total change of management and a 95% devaluation of its currency.

The eradication of the Discount Trade by making it against the rules to buy or sell, for cash, the WIR Franc.

Those two changes resulted in a membership increase from 20,000 to 75,000 and enormous volume increases.

In Switzerland today one of every five businesses uses a barter system to increase commerce and profits.

Differing from the retail and community currency barter segments; corporate barter exchanges typically use media / advertising outlets as leverage.

A typical transaction goes something like this:

Company A has an overstock of a certain inventory. The down-side to having any over-stock are as follows:

If sold in the cash marketplace at a discount it may devalue the entire product line – either by creating a perception that the product is a “discount” brand, or by creating friction with existing customers who purchased the product at full market value and now see a discount occurring.

There are costs created by warehousing, moving and managing excess inventory.

It may depreciate further in value depending on the time taken to move the stock [especially where things have an expiry date and/or are seasonal in nature or have a “model” year [i.e. fashion, vehicles, electronics etc].

Excess inventory is a liability on a balance sheet.

Rather than selling these products at a discount for cash, a Corporate Barter Exchange will often offer full market value to purchase these products and, in return, give trade credits.

These trade credits can be used to purchase large advertising campaigns, thereby turning something perishable, into a new source of referrals [more customers = more referrals], and leveraging the value of the stock for media buys.

Because of the size of the transactions, and the method of disposal of this inventory by the barter exchange itself, most media buys are not settled on a pure barter basis, but usually require part of the payment in cash.

Corporate barter exchanges differ from retail barter exchanges insofar that:

They value, negotiate and contractually purchase stock or capacity from each member – often warehousing the inventory themselves.

The risk of depreciation of inventory is transferred from the seller to the corporate barter exchange. If the exchange cannot move the inventory fast then it may end up with expired, or last seasons, stock on its hands.

The corporate barter exchange  directly markets each item that it purchases and often will sell these on the cash marketplace [cash conversion] and it will pool its cash resources to bulk-buy media at a discount equivalent to 50% or more of the available market-price.

Most transactions are independent of previous transactions and the entire cycle is settled, generally, within a defined time period.

Corporate barter is a good concept for the seller, but is also fraught with risks. What happens if the barter exchange doesn’t get media at a beneficial rate? What if they give you barter dollars and offer nothing in return? How will they sell your product – what methods are in place to ensure that they do not actually end up competing against you in the cash marketplace?

These questions aside, there are many respectable corporate barter exchange operators out there and they offer many creative solutions for businesses with impaired assets.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au

When you enter a barter network you increase your market base as you get new customers which the network, itself, brings you with little, or no, additional effort on your part.

The reason people are interested in making purchases from you using barter are as follows:

They are member of the same barter network as you.

They save cash (as they have earned barter dollars through selling their excess time or products via the barter network to customers they otherwise would not have had).

They need your services (but typically they would not have heard of you in the cash market and/or they have existing cash relationships which, without proper incentive, they would be unwilling to change).

They, in turn, acquire new customers (when you make a purchase from a business using cash you have no guarantee that they will purchase from you. When you purchase using barter dollars this money stays within the network and either that business, or another it spends with, will come back to buy from you – thereby creating repeat business).

Let’s analyze what would it cost to get this customer in the CASH market. To calculate that first you need to answer the following questions:-

Do you need more sales staff because obviously your existing sales staff is at capacity and/or this is growth over and above their ability to make new sales?

Would you need a new advertising campaign to attract the same number of customers in the cash market?

Would you need to come up some special promotion offers like discounts or free gifts to get the new customer base? If so how much and for how long?

How much for an advertising campaign to create the same amount of sales?

Is there any guarantee that investing this cash would REALLY generate the same amount of new sales?

As discussed earlier the reason people will purchase via barter is because it costs them less than using cash. These customers are not even a part of your cash customer base so the only guaranteed way to attract them is via the barter exchange network.

Secondly, in the cash market you must spend money on advertising, or discounting, in order to get new customers. In a barter network you only pay a commission of between 7% to 10% once you complete a deal with the new customer – not before – meaning that there are no upfront costs for attracting the new customer. You may even be able to use the barter dollars you have earned to buy advertising which, in turn, will attract more cash customers to your business.

Hence, if you are part of a barter or commerce network you not only get some new customers that are not available in the cash market but also advertising space which you can use to attract cash paying businesses.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
<a href=”http://www.ormita.com.au”>http://www.ormita.com.au</a>

One such method of trading between nations is called counter trade. Counter trade is an import / export relationship between nations or large companies in which good and/or services are exchanged for goods and services instead of money. In some cases monetary evaluations are made for accounting purposes.

Types of counter trade

Barter: It is the exchange of goods and services for goods and services without any use of money. Like the trade relationship between China and Thailand where fruit has been traded by Thailand for buses made by China.

Switch Trading: In this method one company trades products and services or, in some cases, builds infrastructure like roads, railway lines, hospitals with another nation and, in turn, are obligated to make a purchase from that nation. One such example is a deal proposed by the Philippine Government where they offer to trade Philippine coffee for essential products.

Counter Purchase: In this, a foreign company, or country, trades with a nation with the promise that in the future they will make purchase of a specific product from the nation. A recent example of this is the ongoing trade between Congo and China where infrastructure is being traded for a supply of metals.

Buyback: In this type of counter trade, a company builds a plant, supplies technology, training, etc. In exchange they take a part of output of the plant. For example, a company based in the USA sets up a lets say an automobile factory in X country. They take a part of the total produce as their own but they have setup the industry, provided the technology and the training to X country.

Offset: This is an agreement by one nation to buy a product from a company in another. The terms of contract are subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation. This is more common in terms of defense equipments or space crafts etc.

Need for counter trade

So why do nations need counter trade? Why they can they just trade in cash instead?

There can be several reasons for a nation to choose counter trade over cash import and exports.

Some of them are:

Money: sometime the shortage of cash resources leads nation towards counter trade. Developing nations, particularly, have very limited cash resources but they generally are abundant in natural resources. By engaging in counter trade these nations ensure that the resources available to them are fully utilized and they are also able to fulfill their requirements without spending cash.

Protect local industries: by engaging in counter trade, nations ensure that as they give business to a foreign nation they also create business and job opportunities for their own people by promoting the traded commodity.

Balance of trade: Maintaining a positive balance of trade is very important for every nation. Counter trade is a great way for nations to ensure that the import and exports in the nation are balanced as every commodity that is being bought is equaled with some commodity being sold.

Competitive advantage: when it comes to trading there is also competition between various nations. By providing the opportunity of counter trade to other country you gain a competitive edge over the other nations selling or trading the same product.

Best described by Fisher College of Business, Ohio State University “Counter trade consists of transactions which have as a basic characteristic a linkage, legal or otherwise, between exports and imports of goods or services in addition to, or in place of, financial settlements. Counter trade can be used as an effective international business tool. Counter trade plays a part in 20-25 percent of world trade.”

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
<a href=”http://www.ormita.com.au”>http://www.ormita.com.au</a>

Extra income: barter income is income generated over and above your existing cash sales (for which you are already making the necessary expenses). Also, these barter sales are generated with little or no additional costs. This means that, in order to take on a few extra barter deals, your main fixed expenses do not increase (i.e. rent, salaries of employees, etc). There may be a small increase in expense to service the new customer but given that your business should already be doing well enough to cover its existing cash expenses this new revenue comes at a higher profit margin.

New customers: barter exchanges bring you new customers. The primary reason that these businesses deal with you is because they are a part of the barter network. These are not current cash customers, and are probably not customers you could easily attract in the cash market.

The reason for this is quite simple. In the cash marketplace the number of customers you have is limited by the amount of people who hear about your business in one way or another. In the barter marketplace a separate organisation is going out and sourcing new sales for you from businesses who already have existing cash suppliers but who would prefer to do deals on a barter basis in order to reduce their own overheads.

Income from unused resources: the barter dollars that you earn are income generated by optimum utilisation of your otherwise unused, or partially used, resources – e.g. unsold appointment slots, unoccupied space, free time of employees, unsold perishable and non perishable inventory etc. If these resources can be tapped to generate barter dollars which, in-turn, can be used to buy necessary equipment, services or advertising then you have turned an under-utilised asset into something of value.

Barter commission, a small expense: barter organisations work on a cash commission -  so every new sale they bring you costs a fee between 7% to 10%. Now compare this to the cost of generating a new sale in the cash market. Imagine spending large sums on additional advertising but having no guarantees that the advertising campaign will generate new sales. In comparison: the barter company only charges a commission after it brings you a new sale. In this instance there is no risky advertising, sales or marketing capital outlay to get new customers.

Income will be used to replace cash: even though these sales generate barter dollars these barter dollars can be used wherever possible instead of cash. You will use these dollars to buy products and services that are necessary to run your business. Hence, you will reduce your cash expenses. In-turn, your cash profit will increase.

Barter is helpful offsetting the cost of advertising, materials and everything else associated with our business. It’s just that you need to learn how and where to use barter.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
<a href=”http://www.ormita.com.au”>http://www.ormita.com.au</a>

So, the costs of doing barter are those added costs that are not your fixed costs. They are additional or incremental cost you incur to service the new customer you made through the barter deal. So to work out the incremental or additional cost to take on one new customer is very important. You need to think about the following points:

• Do you have spare time or do you need to hire more people?

• What extra materials are needed? What is the cost of these?

• What other services do you need to pay for from other suppliers in order to service the new customer and what is the cost of these?

• The commission cost to the barter exchange.

Now, lets the beauty salon example again. In this case if we assume the reason the beauty salon was that they have free appointment slots then the need to hire new people becomes nil. Second, the cost of additional products used is very minimal: a little more electricity consumed incase some electric equipment like hair dryer or massager is used, and some extra dollars spent on disposables like gloves, cotton, etc. So, let’s assume that to get a new client through barter you spent $3 including the commission of the barter network.

However, you need to remember that this $3 will now be used by you to service a client who will help you use your unused appointment slots to earn barter dollars which can later be used to reduce the actual expenses you make as fixed costs. So, the cash spent to enter a barter deal when compared to the profit that deal can generate seems a little irrelevant.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au

Imbalance in trade: there is a possibility of imbalance between what you trade and what you get in exchange. As different products and services have different value units. Also, it is very difficult to measure value of services rendered. For example, one hour of plumbing work is not equal in value to one hour of secretarial or accounting work. Hence, absence of common measure of value or a medium of exchange can lead to imbalances in barter. Therefore, using a well established bartering system or network helps you minimize this risk. The values of the goods and services being bartered are determined by these organizations.

Problem of fraud: imagine you trade with a man to handle his tax books for a financial year and at the end of the year he will give your home a maker over in interiors. You did the work for him throughout the year but when the time came for him to fulfill his end of the trade he backed away. What will you do? Hence, to avoid such risks it becomes necessary to check the credentials of your barter partner. Also, always consider the need for a written contract underlining the terms of the barter contract.

Force majeure: these are referred to those major events which are always recognized as events of force and can arise from several causes, the two most common being either “acts of God or nature” like floods, earthquakes, hurricanes, snowstorms, severe winds, etc. or acts of government” like war, emergency, riots etc. In these situations, you might not be able to complete a barter contract and this in turn might lead to breech of contract. So for managing these risks insurance is important.

Terms and conditions: before entering a barter network go through its policies and procedures. Ensure that you are aware of its working. Before joining the club, ask about the policy regarding members who quit when they have a surplus of units. At one club, the management would give us one year in which to spend them.

Prepare for taxes, barter is not tax exempt: Many times people think that as they are bartering they are not liable to taxation. That is not the case. Bartering dollars are exactly the same as real dollars. Earn a dollar in a bartering system, and you’ll still have to pay taxes on that money in real dollars later. Plan accordingly! Otherwise you might become a tax defaulter.

Bartering can be a great way to market your business and gain new clients and trade for services you need for your business. However, there are pitfalls. Plan ahead, avoid the risks.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au