Calculating Barter: Profit

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

Calculating the profit generated through barter is not an easy task. It is not just simple revenue generated, minus cost incurred formula you can apply to your day to day cash profits. It is not that direct but it can be a lot more interesting. To explain better what I am trying to say here, let’s use a few examples.

Let’s first take the example of a hotel. Lets say this hotel spends X amount of money and gets a profit of Y. Then, to add to the existing income and reduce the fixed costs the hotel registers with a barter network. Now, understanding that barter dollars are EXTRA income over and above sales the hotel would normally make, then the following could be interpreted:-

The sales brought to the hotel by the barter exchange are NEW sales.

The customers brought by the barter exchange are customers who would not normally do business with the hotel in cash.

The customers are doing business because the hotel is on barter and because the buyer, too, is saving cash by doing a barter deal.

Now let’s look at the costs incurred by the hotel to "accept" a barter deal.
The hotel has already paid its staff from income earned out of EXISTING cash sales [sales it has made before the barter company came along].
The hotel has already paid its cleaning staff out of EXISTING cash sales.
The hotel has already paid its rent/mortgage out of EXISTING cash sales.

Now let’s see if there are any additional costs and if so what:-
Maybe some extra food for breakfasts?
Maybe some extra electricity? But how much would that really be? A few cents?
Maybe some extra cleaning products used? Laundry powder? Soap? Disposables that they supply in the room like tissues?

So, to make let’s say a sale of one night in a hotel the hotel owner might spend $5 extra in cash for the additional costs incurred to service the new customer. Now, this money earned in barter dollars will be spent to reduce the existing fixed costs like that of cleaning service, advertising cost, costs of beddings, linens, food materials, etc. Now, the initial cash spent on maintaining the hotel has been lowered lets say by Z amount. So, the profit generated in cash has been increased from Y to Y+Z.

Similarly, let’s take an example of an accountancy company. This company already pays its staff, whether they work or not. Let’s say each accountant employed by the company has 15 minutes free daily, other than the assigned breaks and lunch hours. So, the company enters a barter network. They will barter services and, in turn, buy equipment like computers, office material, stationary, even hotel rooms for employees on business travel etc. now lets see what will be the additional costs added to get new customers they get through barter:-

Maybe some photocopying?
Maybe some couriers to and from the customer’s office to pick up and deliver paperwork?
Maybe some stamps for mailing?

So to earn say X barter dollars in accounting income it may cost them less than $20 in photocopies, couriers etc. and using these X barter dollars they will reduce their existing cash expenses. Hence, using a barter network you are increasing your cash profits.

Therefore, it would not be incorrect to say that any barter dollars that you earn on a barter network indirectly help you to increase your cash profits too.