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Trading up

Feb 1, 2007 12:00 AM


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Management Strategies

When Greg Lam bought Superprints (Oakland, CA) over a year ago, the company was a member of a barter exchange. Although he wasn’t familiar with barter, to his surprise, the exchange became a great source of new business. He easily turned idle downtime into revenue by bartering printing services with other businesses within the exchange.

Not only did Lam earn new revenue, he used his barter income to offset normal operating expenses. When he had a problem with his computers and network, he was able to have it fixed through computer consulting purchased with trade credits, not cash. He uses barter for telephone equipment, carpet cleaning and employee benefits such as restaurant and amusement park gift certificates.

“Barter was an easy and profitable extension to my business,” Lam says. “The trade credits come in pretty handy. Whenever I need something for my business, I call my trade broker instead of reaching for cash.”

By using trade to cover costs such as plumbing, entertainment, accounting and even office rental, printers can keep more of their “green dollars” in the bank.

How it works
Because few businesses run at 100 percent capacity, barter transforms otherwise idle profit potential into new income. Barter aids businesses that have reached a certain level of cash sales but still have the capacity to expand output, or have excess inventory and other unproductive assets. A printer who has large costs already sunk into equipment but still has a relatively low cost of additional output can take on extra barter printing jobs.

Seaprint’s (Seattle) Ali Osseiran, for example, started accepting printing jobs in exchange for trade credits five years ago. Osseiran has bartered for furniture, restaurant and salon gift cards, among other things.

Dennis Chu’s San Francisco-based printing company, Output, used barter to replenish its ink supplies. And Mike Moazez of Minuteman Press On Union in Seattle, who has been bartering since 1994, uses barter credits to cover advertising, mailing services and promotional merchandise given to employees and clients.

Chu schedules barter transactions to take advantage of idle time and/or off seasons. “If you have a full-time staff, you can use your staff and equipment to [take in jobs and] accumulate credits that you can use down the road or later in the year,” he says.

An ideal barter network is comprised of a variety of businesses, from restaurants to dentists to moving companies. It is an efficient system that makes trading easy—trade deals are facilitated with the help of a barter exchange representative, who works deals to serve the client’s needs.

Don Asher of Golden Gate Litho (Oakland, CA) has used trade to improve his office space. He was able to get a new alarm system installed and is looking into purchasing carpet cleaning, plumbing and air conditioning services in the future. “I don’t have the cash to do all of those things that I’d like to do, so this is the way for me to get it done. It makes sense,” he says.

Calculating the cost of trade
Before jumping into barter, printers must know their “cost of trade,” or the real cash outlay involved in doing a barter transaction. This is determined by calculating direct costs, such as products or commissions, non-employee expenses that will be incurred before a trade takes place.

A printer, for example, should consider paper costs; however, it is possible that labor and fixed expenses will not increase by taking on extra barter business. If the costs associated with the barter project are high, a printer might consider transacting in cash instead.

Experience shows that to avoid cash flow problems, a business should not exceed a forty percent cash outlay per barter transaction. For printers, this means avoiding barter jobs that are “paper heavy” or entail large out-of-pocket expenditures.

Rules for successful bartering
In trading, either one-on-one or through an exchange, there are a handful of principles to keep in mind to avoid problems.

1. Cash is still king. Printers must not take more trade than they can comfortably handle and wisely spend. Trade jobs, ideally, are not taken at the expense of cash clients. “Because the equipment and the capability that we have, we can only handle certain types of jobs efficiently. And we also like to offer our service during times when our schedule allows doing additional work,” Chu says.

A barter exchange can help a printer maintain a healthy ratio of cash vs. barter clients and make sure the business is not forced into deals it cannot afford to make. “We have the option to decline to do the deal if we’re at capacity or we don’t like the terms,” says Asher. “I’ve had to deal with a couple of requests I couldn’t handle. I can decline and not even have to worry about it.”

Lasky Trade Printing’s (Belmont, CA) PJ Hawkins, also a member of a barter exchange, concurs with Asher. “A barter exchange should work with your interests in mind; you never should feel pressured to do any job. If I feel that I can’t do it, it has always been OK to say, ‘No,’ and it doesn’t hurt my standing within the exchange.”

2. Formalize trade deals. Bartering is a business deal—the standards and etiquette of the cash world still apply. Both parties should expect and deliver courtesy, high standards and a commitment to putting out a great product. Due diligence must be practiced in selecting a trade partner.

When applicable, deadlines should be set and all agreements put in writing. Trading parties should anticipate dealing with disparate perceptions of product or service value before work begins. Talking about this openly can help ensure a fair deal.

3. Some flexibility is required. Flexibility is the most important attitude to adopt for successful trading. A common complaint among barter exchange members is that they can’t spend their trade dollars effectively within the exchange. Often this is because they are not flexible about how and where they spend their credits. This might mean having to switch from established vendors to those within the barter exchange or having items shipped from different locations.

4. Remember the taxman. Barter income is considered taxable and must be reported to the IRS. For this purpose, barter exchanges issue 1099-B forms to members and the IRS at the end of a tax year. The expenses covered with trade can be deducted. This means barter can be used for tax-deductible expenses to avoid a large tax bill at year’s end.

To avoid cash flow problems, carefully consider your level of barter activity to ensure it can be spent relatively quickly. Discuss it with an accountant to prevent surprises when tax season comes. Don’t overlook any potential Sarbanes-Oxley requirements.

Membership has its benefits
Businesses intending to join a barter exchange should expect to pay an initiation fee (typically $100 to $500), annual dues and a five to 15 percent commission on every trade. In return, the exchange will provide ongoing account maintenance, a monthly statement, checks or debit cards, and a membership directory. Some provide a line of credit so trading can start right away.

Before joining any barter exchange, a business owner should compare the services and fees of the different exchanges in the community. Do the member businesses offer useful products and services? Does the exchange advertise itself and its members?

A strong barter economy is maintained by adding new members on a regular basis. At the same time, members can get connected to high-profile or preferred clients through the network, thus building a portfolio and getting more exposure to cash customers.

Not all barter networks are created equal. The membership roster of a barter exchange, usually available upon request, might ultimately determine how useful it will be. “You have to find a barter network or system that has suppliers you can use potentially on a daily basis,” Chu notes. “Thirty thousand dollars in credit would take a long time [to use up] if we were only spending it in restaurants.”

There are two national clearinghouses for barter exchanges: the National Assn. of Trade Exchanges (www.nate.org) and the Intl. Reciprocal Trade Assn. (irta.net). Either can provide a list of exchanges in specific areas.

In the end, the benefits of bartering are limited only by a business owner’s creativity. As business becomes more competitive, the concept of trading promises to become more popular. Small businesses are discovering that bartering can become an integral component of their business plans, enabling them to see higher profits, meet like-minded business contacts, and improve the quality of their business and personal lives.

Networking value
Barter exchanges are “mini economies” that link businesses together into trading networks. Barter credits can be spent with other barter exchange members in place of cash.

Barter exchanges operate like banks or credit card companies. For a small cash commission (typically five to 10 percent of each transaction), they facilitate trading between business members and provide monthly transaction statements. Instead of cash, barter exchanges issue barter credits that are used like cash between exchange members.

For example, the owner of a sign painting company needs brochures.

Instead of paying with cash, he goes to a printer within his barter exchange and pays with trade dollars. The printer does not have to spend his trade credits with the sign painter—he can spend with any other business in the exchange. He may, in fact, decide to eat out at a restaurant, seek legal advice for his business or displace his monthly courier expense.


Chris Haddawy is senior vice president of business development for BizXchange and has been in the barter industry for more than 18 year. Contact him via (800) 939-BIZX or www.bizx.com.