Michael LaBaw, president of Sound Telecom fell into barter about twenty five years ago, when a client couldn't come up with enough cash to cover their debts.
To get paid, LaBaw would have to enter into a barter transaction. LaBaw joined a barter exchange, and immediately found several ways that his firm could use barter. In the 25 years since then, Sound Telecom, a provider of call center services, has grown from a local firm operating out of a rented suite in Issaquah, Wash., to one with a national presence. To be sure, many actions contributed to the company's growth. Still, "barter is one of them. It's been extremely helpful," LaBaw says.
The U.S. barter industry totals about $8 billion, and is growing at between 5% to 10% annually, estimates Ron Whitney, executive director with the International Reciprocal Trade Association, an association of barter exchanges. This number includes just barter transactions completed through exchanges; it wouldn't cover, for instance, a painter who directly trades his services with the restaurant down the street.
Barter exchanges facilitate what are known as non-reciprocal barter transactions, says Alan Zimmelman, spokesperson with ITEX Corp., a Seattle-based exchange. In other words, a lawyer might offer services to a bakery that needs legal help. Then, working through the exchange, the lawyer would spend barter dollars on hotel rooms for an out-of-town conference. The exchange acts as a marketplace for its members and also handles the accounting for the barter transactions.
For their services, the exchanges charge a fee. Most run between 5% to 10% of the value of the transactions, LaBaw says, based on his firm's experience working with several exchanges. Under some arrangements, the seller pays; under others, the buyer; and in some, both split the fee, he says.
Exposure to New Customers
Businesses can benefit from barter in several ways. "You can use barter to augment or complement your cash flow," says Sydney Morgan Diamond, Sound Telecom CFO. For instance, Sound Telecom has used barter dollars to pay for cleaning services, saving its greenbacks for other purchases. "Barter is a normal part of our sales projects and budget," she adds. "We monitor it llike any other sales activity." It is, she says, "a system that allows you to make certain purchases with an association of like-minded businesses."
Barter also can offer businesses a way to gain exposure to new --- often, cash-paying --- customers. Arthur Conforti, president of Beneva Flowers & Gifts in Sarasota, Fla., has used barter dollars to purchase magazine and TV advertisements, as well as to gain entre to local restaurants that only would purchase his products on barter. "It helped establish our name and show our work," Conforti says. Beneva now is one of the top 50 florists in the nation, he says. Again, barter has been one of a number of steps contributing to the company's growth. "The end result is that customers see our products more," because of the marketing Beneva was able to undertake through bartering, he says.
Before joining an exchange, check out the other members, adds Conforti, who also heads up finance for Beneva. "Make sure you would do business with them whether it was on (barter) trade or not." The businesses also should treat cash and barter customers the same. That means no boosting prices just for barter customers. In fact, most exchanges prohibit this, Zimmelman says.
When It Makes Sense
Barter is a viable strategy for CFOs to consider when their companies have excess capacity, and it is particularly useful for businesses that have "vanishing assets," says Ron Unger, director with the International Barter Exchange in Sarasota, Fla. Examples include hotels with vacant rooms and restaurants with empty seats; if the rooms or seats aren't filled, the opportunity to earn money from them evaporates forever. In contrast, many manufactured products can be stored in inventory and sold at a later date.
What's more, accommodating barter customers typically increases only a business' variable costs. For example, a restaurant's food costs will, of course, increase when it serves a barter client. However, its staffing, utility and other costs probably won't be affected. "I can add this (barter) business without having any tremendous incremental cost," LaBaw says.
While almost any business can use barter at some point, it tends to be less advantageous for businesses with tight margins. They often find it harder to cover the exchange's fee.
In addition, most businesses will want to keep their barter transactions to about 5% or 10% of their revenue stream. Sound Telecom limits its barter volume to about 3% of sales, Morgan Diamond says. "Barter is an excellent vehicle," she says. "But, you can take a greenback and spend it anywhere."
Keeping the Books
When it comes to recordkeeping, a barter account is similar to any checking account, Diamond says. "The deposits roll in, and the barter drafts clear." Income from barter transaction should be included in your overall income numbers. Business purchases made with barter dollars can be deducted.
One note: Barter sales can't be deferred from one year to the next, even if the product or service hasn't been delivered. "You must include in your income the value of the (barter) credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year," according to IRS Publication 525. The IRS web page, "Bartering Income," offers additional instructions on recording barter income.
Annually, barter exchanges are required to send IRS Form 1099-B to both their members and the IRS. This form, Proceeds from Broker and Barter Exchange Transactions, lists the value of the item(s) traded. "The valuation of the item (traded) has to be done in a reasonable way," says Abe Schneier, senior technical manager on the tax staff of the American Institute of CPAs. Typically, that means using fair market value, he adds.
For businesses with excess capacity, barter can be a viable complement to their cash business. "It allows us to conserve cash, but to buy things we need anyway," LaBaw says.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.