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The World of Barter
You can manage your inventory and enhance the sale of products and
services through some new-fashioned horse trading.
By Don Mardak
Mention the word “barter” to your CEO, and it might conjure
images of Revolutionary War soldiers trading furs or foodstuffs
along the banks of the Hudson River. What many people don’t
realize is that not only is the practice of barter still alive
today, but it has evolved into an accepted and effective method of
inventory cost management for companies of all sizes.
More than one-third of all U.S. businesses engage in some form of
barter, and fully 65% of the companies listed on the New York Stock
Exchange use barter to reduce inventory, bolster sales, and ensure
capacity at production facilities, notes the barter industry’s
leading trade group. In addition, the U.S. Department of Commerce
estimates that between 20% and 25% of all world commerce is done
through barter.
Actually, barter networks provide goods and services to an estimated
200,000 companies in the U.S. and Canada. The 25 largest commercial
exchange firms handle approximately 50% of the estimated $700
million in transactions that flow through these networks annually.
Corporate barter of tangible products and services is now a $20
billion industry.
What makes these numbers even more compelling is that this degree of
penetration was the result of grassroots activities, not an
organized marketing or industry-specific effort. This reflects the
commitment of like-minded companies to one of the first, and most
elementary, forms of business transaction. The evolution of barter
into a more formal, sophisticated process is a testament to its
timelessness and continued viability even in today’s
technologically based, global economy.
Essentially, if something can be bought on the free market, chances
are it can also be bartered. From airline seats to hotel rooms to
advertising space, any combination of products, goods, and services
imaginable are bartered. National trade exchanges facilitate these
transactions and make it easy for buyers and sellers to find each
other.
Barter Then and Now
The modern barter industry took shape in 1969 with the creation of
the first retail barter exchange. Prior to this time, a lack of
formality was barter’s most dominant trait. This was probably why
the notion of “barter” often carried a somewhat mysterious or
even negative connotation.
But as businesses realized the benefit of greater structure and
process for barter, more than 400 small exchanges were created
throughout the U.S. Unfortunately, with more structure came less
variety. The simple fact was that the type of products available
through any given network were limited to—and indicative of—the
companies who were participating. For example, a clothing store
chain in California might have been limited to local trading with
other apparel companies, or a manufacturing company might have been
restricted to exchanging spare components with companies in their
home city.
Over the last 15 years, industry consolidation and acquisitions
reduced the number of exchanges almost in half to approximately 250.
More important, through this consolidation the geographic reach of
the remaining networks expanded, further enhancing and advancing
barter.
As the practice of barter grew, it also adopted the structure and
process associated with most established industries—namely,
self-regulation and guidelines. In 1984, at the behest of a group of
independent trade exchanges, the National Association of Trade
Exchanges (NATE) was formed. The association serves to ensure that
consistent financial, fiscal, and ethical practices are pursued by
all independent, commercial bartering enterprises worldwide through
accreditation and training programs. These standards are
particularly effective as barter continues to evolve beyond simple
purchase/sale transactions.
Recognizing the proliferation of barter trading, the Internal
Revenue Service simplified the tax process by developing a series of
barter-specialized forms. Barter transactions that represent sales
revenue are taxable as ordinary income to the recipient of the trade
dollars in the conventional dollar amount of the trade dollars
received and conversely are deductible as ordinary expense by a
purchaser in the conventional dollar amount of the trade dollars
paid. Barter income is reportable by the trade exchange to the IRS
on Form 1099B.
The Barter Advantage
Under traditional finance theory, a company is worth the present
value of its future cash flows. As such, companies can maximize
their value by expanding cash inflows and reducing cash outflows.
The value proposition of barter to this equation is extremely
compelling as it can influence both sides of the equation.
In a typical sale, companies will offer their goods or services in
exchange for cash (and equivalent) consideration—a cash inflow.
But to support existing and new sales, companies are required to
invest in both hard assets, like property, plant, and equipment, and
in intangible assets, like human and intellectual capital—a cash
outflow. Companies that use barter as an additive function to their
existing sales strategies and inventory management processes reap
its benefits, thereby maximizing cash flows.
Here’s how it works. Instead of traditional cash currency,
today’s barter networks use proprietary currency methods referred
to as “barter dollars” or “trade dollars” to complete
transactions. Instead of receiving cash for their goods or services,
companies get trade dollars, which can then be used to purchase any
products or services being offered by other members of the exchange.
Clients are charged a small fee for each completed barter
transaction. Since a typical member is purchasing a good or service
in exchange for his or her own good or service, each purchase has a
high likelihood of resulting in a completed sale transaction.
Barter exchanges are often considered secondary markets since most
companies that enter into trades otherwise wouldn’t be doing
business. Therefore, barter transactions can be considered
incremental business. In addition, the value proposition of barter
networks is highest when companies are operating under full
capacity. This usually translates into companies with unsold
inventory or unused service capacity. Thus, when companies are
having difficulty selling their goods or services in their primary
markets, they can turn to barter networks as a means of absorbing
the slack.
In doing so, a company can offer its goods or services to an
entirely different market of potential buyers whereby new sales can
arise even beyond the point of the initial transaction. Also, the
company can limit its cash outflow by purchasing needed goods or
services using cashless barter dollars.
Barter can be readily applied to all types of businesses seeking to
improve their inventory management of tangible products as well as
intangible services. Given the advancements in geographic reach and
scope, as well as expanded network capabilities and currencies,
it’s relatively easy for companies of all sizes to become involved
in the barter process. Throughout the U.S. and Canada, this has
evolved into the Barter Association National Currency (BANC), which
has become the standard monetary exchange unit for more than 75
national barter networks.
Through their NATE membership, these independent trade exchanges
have come together to create the most accepted standardized
international barter currency in the world. This offers tremendous
inventory management flexibility to companies of all sizes.
Whether for an excess of traditional inventory or seasonal
merchandise sitting idle in a warehouse, barter serves as a
compelling alternative to costly inventory management issues.
Apple Vacations
Apple Vacations, one of the largest travel companies in the United
States and a leading international charter airline operator, has
been using the barter network for more than five years to grow its
business and expand into new markets.
Like many airlines, the company couldn’t always ensure that its
jets were departing at full capacity—a major source of lost
revenue. In addition, as a company operating in numerous markets
nationwide, Apple’s advertising and promotion requirements are
quite extensive. Regardless of negotiations, national advertising
typically is an extremely expensive proposition, yet Apple has been
able to successfully convert its inventory of empty airline seats to
effectively remedy both challenges.
By using barter, Apple has been able to run promotions in new
markets without increasing its marketing budget. The company
exchanges unsold airline seats for advertising, event marketing, and
promotional materials to support its growth and promotional
initiatives. In the last year, Apple has completed more than $90,000
worth of barter exchange trading.
Barter has become a necessity for Apple, not just a means for
filling empty seats. The trade exchange allows the company to
maintain a presence in markets where the advertising budget would
have been depleted otherwise.
Clear Channel Communications
Clear Channel Communications, the largest radio station network in
the country, relies on the barter system to fill its airtime
inventory requirements. Like Apple, Clear Channel faced two distinct
issues. First, it regularly had surplus airtime that was resulting
in lost revenue. Second, the company had an ongoing need for an
inventory of goods and services that could be awarded to listeners
during broadcast programming.
Barter proved to be the answer that linked and addressed both areas.
Clear Channel exchanges its time-slot inventory to purchase a
variety of promotional goods and services, such as airline tickets,
sporting and concert tickets, printing services, and other
materials. These exchange transactions have allowed the company to
increase its purchasing power without increasing expenses or
straining existing budgets.
Barter has opened many avenues and also created new relationships
that have been fruitful on both the buy side and the sell side for
Clear Channel. You might not consider airtime to be a commodity that
can be exchanged, but quite the opposite is true. Clear Channel is
able to maximize its airtime inventory while perfectly balancing it
with demand for promotional goods. This inventive application of
barter demonstrates the limitless variety of trading available to
customers of the exchange system.
A Win/Win
Because companies are faced with constantly shifting supply and
demand factors, barter is a highly effective tool that enables
organizations of all sizes to creatively manage their inventory. It
enables business owners to gain value from goods or services that
would otherwise be rendered worthless. And barter provides an
effective means for companies to expand into new markets, gain trial
usage from prospective customers, or increase market share. What was
once a simple type of goods-for-goods transaction has evolved into
an established and accepted system for facilitating a limitless
variety of exchanges for products and services.
Don Mardak is the founder and president of International Monetary
Systems, a national barter network. He is a two-term president of
the National Association of Trade Exchanges. You can reach him at
Donmardak@hotmail.com.
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