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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. (Cost Management).

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 timeslot 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.
COPYRIGHT 2002 Institute of Management Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2002 Gale, Cengage Learning. All rights reserved.

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Author:Mardak, Don
Publication:Strategic Finance
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Jul 1, 2002
Words:1713
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