Financial benefits of barter.

…extension of this article

1. Reduce your expenses.

You are reducing the cost of your expenses, by sourcing the products and service at cheaper price.

Let say there are two companies. Company A and Company B. Company A produces commodity C(a) and Company B produces commodity C(b). The cost of C(a) to A is x(a) per unit and the MRP(Market Value) of it is y(a) per unit. The cost of C(b) to B is x(b) per unit and the MRP (market value) of it is y(b) per unit.

In Barter, both the parties pay consideration of equal worth. The worth of a commodity to other company would be the market value of that commodity. Thus, barter happens at MRP or Market Value only. So if we assume that both the companies agreed to swap their products of worth Y, then the number of units which A would barter would be Y/y(a) and while B would barter Y/y(b).

Since there is a cost involved in manufacturing a product, or rendering a service the gross cost to the company A for barter would be x(a)*Y/y(a), which will be represented as X(a) from hereon and for company be it would be represented as X(b).

Ideally, profit of selling a commodity to consumers at MRP would be the difference between MRP and the cost of production. But the cost of production is not the only cost which company incurs while selling the goods in the open market, there is administration and selling cost also included. Also, companies do not sell their products directly to the consumer, they sell it via supply chain. Let say the net profit which a company earns is p(a) per unit on C(a) and p(b) on C(b) {(P(a) for Y/y(a) units of C(a) and P(b) for Y/y(b) units of C(b)}

Profit from a barter deal for Company A over a normal cash deal would be = Y-X(a)-P(a)

While, for Company B profit would be = Y-X(b)-P(b)

Hence, the profit is equal to the amount of excessive expenses made over the cost of the production to earn the revenue Y from selling Y/y(a) or Y/y(b) amount of commodity C(a) and C(b) respectively.

But as mentioned above, to overcome the problem of double coincidence of wants, it’s better to barter through the barter exchange.

If barter company charges D% of the deal amount i.e Y, then the profits would be reduced by D*Y/100

Hence, the profit would be Y-X(a)-P(a)-D*Y/100 or (100-D)*Y/100 — X(a)-P(a) for company A and for company B it would be Y-X(b)-P(b)-D*Y/100 or (100-D)*Y/100 — X(b)-P(b)

Outcome:

1. For companies with the well-established brand who incur very less admin and selling expenses or have zero level in the supply chain, tend to have higher profitability on sale of per unit of product. For such companies the barter may turn out to be deal of loss. But on the other hand, if companies have high selling expenses, or they are not able to convert their inventory into sale, tend to have very low profitability (even zero or negative), for such companies the barter would turn out to be a boon.

If you think barter saves cash flow then its a myth. It saves us from the effort of selling the product to cover our expenses by simply swapping the product.

Example: (In perfect market scenario — no selling/admin cost, no barter commission, no tax, no discounts) Some people may argue that by selling goods/service liquidity increases. For example in above example Company A would receive a cash inflow of Y if it sells the Y/y(a) amount of the commodity C(a) instead of bartering it with Company B. But its not true, lets have a deeper look on the cash flow in the transactions. If company A which is in need of C(b), can acquire it in two ways.

a. By purchasing it by paying cash. If the company A, purchases the product C(b) from B, then following transaction will happen

i. Company A will burn X amount to produce C(a). Cash inflow = -X

ii. Company A will give Y amount to buy product C(b). Cash inflow = — Y

iii. Company A would sell C(a), in open market and earn amount Y. Cash inflow = + Y
Net Cash inflow = -X-Y+Y = — X

b. By swapping C(a) for C(b)

i. Company A will burn X amount to produce C(a). Cash inflow = -X

ii. Company A will give away C(a) to Company B in exchange of commodity Y. amount to buy product C(b). Cash inflow = 0
Net Cash inflow = — X

1. Profit from barter = Market Value Of Goods/service bartered — Worth of that product to holder (for the manufacturer it would be the rate at which it sells to the next agent of supply chain i.e cost of Goods/Service(Manufacturing expense) + Profits earned by selling it).
2. Profit from barter = Market Value Of Goods/service bartered — Worth of that product to holder — barter commission.
3. Profit from barter = Market Value Of Goods/service bartered — Worth of that product to holder — barter commission — Cash discount (you might receive on purchasing in bulk).

………. (Yet to be completed )