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Wednesday, May 25, 2005

An old way of doing business

A local business organization is organizing small businesses who would like to do part of their business through bartering!

A new barter exchange recently opened here, and two existing ones lately have jump-started their marketing efforts. Businesses pay a one-time membership fee, a small monthly fee and a percentage of each transaction. They exchange goods and services, which can be converted to credits and used throughout an exchange's membership. The more members, the broader the options for barter.

Without an exchange, John Wiley would not have done his deal with Tony Sandlin. Sandlin has a hot air balloon ride business and needed promotional signage for his van. Wiley has a custom decal business that makes signage for vehicles. Wiley had no time for riding around in a hot air balloon -- he was busy building his business. He took the trade credits he got from Sandlin and used them to pay for something he wanted: a business consultant. Sandlin's account was debited.

I'd like to offer some suggestions on improving the usefulness of this exchange.

First, it needs to be expanded. All businesses, not just those that are part of the exchange, should be encouraged to accept the exchange's credits.

Second, it should be easier to signify one's credits. Paper scrip and metal tokens, each with a value, could be used to represent credits in the barter exchange.

We need a name for this improved system. Let's call it... oh, I don't know... cash.

The article includes a reason why these types of bartering exchanges exist:

Dave Sweet, who owns 10 Chem-Dry carpet cleaning franchises in Central Indiana, has traded for computer printer cartridges, printing and mechanical work on the company's vans, among other things. "Whenever I need something, I look to barter," Sweet says. By bartering, instead of paying cash, Sweet gets the benefit of his profit margins: $100 in cash is worth a flat $100; but $100 worth of carpet cleaning, to a carpet cleaner, is worth less than that.

I don't see it that way. A carpet cleaner decides to charge $100 cash because that covers the cost of the chemicals used to clean, maintenance on equipment, overhead for the business, his time and effort, and a profit. Certainly, his direct costs are less. However, exchange this same $100 service for $100 of other goods, and there's still an opportunity cost. That same time could have been used to receive $100 in cash from another paying customer. Barter or not, it's still worth $100 cash. (Unless it's off the books, and the IRS doesn't get its cut. But this exchange is on the up and up.)

There are probably other advantages to barter exchanges, including cash flow and old fashioned networking. But I don't think it's worth paying for the privilege of bartering.


At 12:58 PM, Blogger Dave Justus said...

I agree with you. The whole point of cash is that it is more efficient than barter.

Now, I would bet that there is a tax advanantage to this system though. If you take $100 in cash for a service, you have no choice but to record it as $100. If you barter though, it is much easier for both sides to just account for the direct costs, perhaps $50 each.

However, that would be a reason for tax reform, not for bartering. If the incentives for bartering are that great, despite the inefficiencies then obviously taxes are too complex or too high.


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