Ever wonder if bartering was right for your business?
One of the biggest challenges that new entrepreneurs face is building clientele. How can you convince people to give you an opportunity when your credibility has not been well established? Further, how are you going to finance all of your expenses when cash is tight because you are just starting out? Well… you could find other businesses to swap services with. As a business person your greatest resource is your time. When you are able to receive services that you need without having to give up your second greatest resource (cash), you have now effectively freed up your time. Time that you can now use to do whatever it is that you love to do and do well. Think about it; you have this amazing thing that only you can do and all you really want to do is show people how it can help them. At the same time your business needs very specific services to help take it to the next level. This is why bartering makes perfect sense! This is the principle that trade is built on, this is exchange. The only difference between barter and a sale is that when you swap your services no money is changing hands. This by no means implies that there is less value in the exchange. In fact I highly recommend that when you enter into a barter agreement that you apply the Fair Market Value to both ends of the exchange. This way you can avoid any potential hard feelings later on. It is so very important to manage expectations from the beginning.
Top Reasons why you would want to swap your services
- There is great potential to open doors to new clientele. A happy customer is a happy customer. Serve your swap buddy well and they will be certain to tell others about how great you are. Not to mention now that you have proven yourself they are more likely to want to work with you again in the future.
- You are trading resources you already have (your time or product) in exchange for services you want or need.
- Improve cash flow. You now have the ability to receive much needed supplies, services or equipment without using cash. At this same time you can translate your excess time or product into real returns.
- Reduce bad debts. You don’t have to worry about delinquent clients or credit scores because you are receiving payment instantly.
5 Steps to Stay on the Up and Up
Below are step by step instructions on how to set up and enter a bartered transaction in your accounting software:
- Define a new payment method. Just as you designate cash, cheque, credit or gift certificate; you will also need to set up a unique payment method for your bartered transactions. I recommend using “Goods and Services”
- Create a bank new bank account. It doesn’t matter which software platform you use, you can easily create a new bank account. I recommend naming the account “Barter” but you could also choose something like “clearing account”. The important thing is that it is separate from your petty cash and your actual bank accounts. Set it up as a Chequing account. You will need this account to keep track of the products and services that you plan to barter, both giving and receiving. While no cash will actually be received or paid there is still value to the products or services you will be swapping.
- Set up the customer and vendor accounts. This part can be a little tricky because most accounting applications don’t allow customers that are also vendors and vice versa. The work around is to set up your trading partner on both sides: payables and receivables. Simply add a “v” for vendor and “c” for customer at the end of the account name.
- To record what you are giving. Create an invoice for your products and services just like you would for a regular sale. Once you have done this you will receive payment using the payment method outlined in step 1 and deposit it to your Barter account from step 2.
- To record what you are receiving. From the bank account in step 2, write a cheque to the vendor you created in step 3. Choose your expense account and don’t forget to add a brief note in the details section describing what you are receiving. Alternately, you can enter a vendor bill and record the payment using the payment method set up in step 1.
Limitations: The Fine Print
The key to a great swap is that the exchange is mutually beneficial. In order to be fair both parties need to have something that the other wants. The other key consideration is how you will value both sides of the trade. Negotiate the terms up front and get it in writing. While bartering is fully legal there are often tax implications. If you are trading products or services that you would normally earn income from it needs to be recorded on your books. The same goes for receiving goods, services or capital property. As an example let’s say you are a graphic designer who designs a website in exchange for a new laptop. You need to report the fair market value of the service you offer in return for the retail price of the product you have now received. So what are you waiting for? Get out there and make your first swap! Have you been using barter to grow your business? Please leave a comment. I would love to hear how you have made this work in your business…