Calculating Barter: Expenses

Calculating Barter: Expenses
Author: Neha Gupta, Writer for Ormita Australia Limited

Whenever a successful business man enters any new deal the first question he or she asks is what will be cost or expense of entering this deal. Same is the case with the people entering a barter deal. They have the question in their minds as what will be the cost of entering the barter or commerce network. And this is a valid reaction from any entrepreneur. So, what would be considered the cost of doing barter?

Most businesses already have some fixed costs that they cannot cut. Let’s take an example of a beauty salon. The owner would pay the employee salaries every month. They cannot cut employee salary if the employee was free for an average of two hours everyday. Also, they cannot cut the number of employees as during high or peak season they need these employees to keep with customer appointments. Hence, this is a fixed cost. Also, rent is going to be paid every month. Even if you have a chair lying vacant your rent is a constant cost. Hence, even if you enter a barter network these costs are not affected.

So, the costs of doing barter are those added costs that are not your fixed costs. They are additional or incremental cost you incur to service the new customer you made through the barter deal. So to work out the incremental or additional cost to take on one new customer is very important. You need to think about the following points:-

Do you have spare time or do you need to hire more people?

What extra materials are needed? What is the cost of these?

What other services do you need to pay for from other suppliers in order to service the new customer and what is the cost of these?

The commission cost to the barter exchange.

Now, lets the beauty salon example again. In this case if we assume the reason the beauty salon was that they have free appointment slots then the need to hire new people becomes nil. Second, the cost of additional products used is very minimal: a little more electricity consumed incase some electric equipment like hair dryer or massager is used, and some extra dollars spent on disposables like gloves, cotton, etc. So, let’s assume that to get a new client through barter you spent $3 including the commission of the barter network.

However, you need to remember that this $3 will now be used by you to service a client who will help you use your unused appointment slots to earn barter dollars which can later be used to reduce the actual expenses you make as fixed costs. So, the cash spent to enter a barter deal when compared to the profit that deal can generate seems a little irrelevant.