Any business can barter their goods or services. For example, if you are looking at opening a florist you could approach a local restaurant and offer to supply them with fresh table flowers each week, in exchange for a $100 meal every Sunday. The cost to supply $100 worth of flowers to the restaurant would not actually be $100; maybe the wholesale price is only $30. Thus as the florist you get to eat out each week, have a $100 meal, and save $70.
Today there are organised third-party record keepers called trade exchanges that have thousands of members in almost every industry that help facilitate these types of contra transactions. It’s a small but rapidly expanding segment of the economy. The member directories of these exchanges are the size of a large Yellow Pages, and they have members all over the world. The exchange acts as a conduit. It’s like a bank, and a lot of people lose sight of this fact. The exchange simply acts as a conduit in the transaction.
Basically you are going to get the best benefit from your trade exchange if you use it only in your down time or when you have excess stock it’s not designed to replace cash business, only compliment it. There are a few costs involved , but basically during your quieter periods you can offer your products or services for barter dollars which you keep in your bank until you have the need for a product or service offered in the exchange.
To explain how this work let’s use a typical example. Let’s say you are a florist again, wishing to get some printing done for your business so you can attract extra sales. In the cash economy the printer might charge $10,000 for the flyers, brochures and business cards that you need. If you approached the printer to try to work out a direct contra (like the one with the restaurant above), it’s fairly unlikely the transaction would occur as the printer would have no use for, say 1000, $10 bunches of flowers to cover the cost of $10,000 for the printing.
However, with the use of a trade exchange this contra deal is possible as trade exchanges offer members an interest-free line of credit to initiate and support trading. If the florist and the printer are members of the same trade exchange, the florist can use their interest free line of credit to pay for the $10,000 worth of printing, in what are referred to as trade dollars (T$). Instead of being in debt or owing the printer directly, the florist now owes the exchanges T$10,000. To pay off this debt of T$10,000, the florist over the next 12 months might sell T$2000 worth of roses to the printer, T$500 worth to an accountant, and T$6000 to a reception centre, and so on, all of whom are members of the trade exchange. So you can now see how this contra transaction could work and be facilitated using an exchange.
Let’s look at it from a dollars and cents perspective:
For a florist to sell 1000 T$10 bunches flowers and pay off the T$10,000 debt, they would obviously incur out-of-pocket costs to purchase the flowers at wholesale. I am not a florist, but for this example let’s use the same costs as above and say the average wholesale cost of a bunch of flowers (which they sell for $10) is $3. They will incur a total cash cost of $3000 to supply 1000 bunches to the exchange members.
Being a member of a trade exchange is not free. There are fees involved for the exchange to act as the record keeper. These fees are described and explained below, but for the sake of making this explanation easier let’s say the fees for selling T$10,000 worth of flowers is $1000 in cash. Therefore the total cash cost to the florist to pay back the T$10,000 in flowers is only $4000 ($3000 for the flowers and $1000 in fees) that’s a $6000 SAVING in CASH!
In other words, at the end of the day they have received $10,000 worth of printing for the cost of only $4000. They are only having to pay 40 cents on the dollar for every purchase they make using the trade exchange now that’s power! But it gets better. These 1000 bunches of flowers are generally going to be sales they would not have otherwise made. That’s new business to the florist, and they have saved the 1000 bunches they may have had to otherwise throw out and write off.
Looking at it from the printer’s point of view, they have received $10,000 worth of new business they would have otherwise had to forfeit, which they can now spend on accounting services, holidays, phone bills, graphic design, and whatever else they need, which they would have otherwise had to pay cash for. Again, to provide the T$10,000 in printing the printer mayonly have had raw costs of $4500.
What about overheads and wages, you may be asking; they were not included on the calculations. Exactly right! As the idea for activity in a trade exchange is to bring news sales and/or take up downtime or idle stock, there are going to be no extra overheads to provide the additional services. It’s only the incremental costs that need to be considered. The rent is already being covered by your cash customers, as are the wages and electricity, and all the other overheads. A trade exchange is designed to help milk every spare moment of downtime (printer) or idle inventory (florist).
HEY, did you know i’m running a contest while I am away…