SELL WHAT YOU HAVEN'T
PRODUCED (yet)
By Craig Kaufman
Last issue I discussed the benefits of
selling excess inventory through barter. This helps you purchase items you would
usually use cash for. However, you can also sell unproduced products and services
for barter credit. For entrepreneurs with lots of capacity but few sales this can
offer a real boost.
Many businesses have profited by selling or
trading goods not yet manufactured or services yet to be delivered. If a hotel is
running at 70 percent occupancy the remaining 30 percent of vacant rooms are pure
waste. That's because most of costs of the hotel are fixed: the mortgage, insurance,
salaried staff, etc. The cost of having a room occupied is very marginal- the time
of labor for changing and washing the sheets and minor sundries. By creating a
"due bill" or "promissory note" to deliver hotel rooms at an
unspecified date, future vacant rooms can generate income now in the form of barter
credits. These credits can be used for everything from pest control to mattresses,
printing, towels, sheets and more.
What is a due bill or promissory note?
It is a legal, enforceable contract that the issuer will deliver goods or services
according to indicated terms. In that respect,it is much like a check on a bank
account or a Federal Reserve Note (U.S. currency) except that the due bill is actually
backed by goods and/or services, unlike U.S. currency. For this reason many people
use due bills as a form of money. They are "spent" much like cash and may
be redeemed by someone several hands down from the original exchange.
This "liquid" nature of due bills
is another reason care should be taken in writing due bills. Unless the correct
restrictions are added, a due bill could fall into the wrong hands and cause
problems. For example, the hotel rooms should have certain times of the year blocked
out so peak season cash business isn't lost. With restrictions the issuer can insure
that no cash business is lost to barter business when the due bills are redeemed. Of
course, restrictions make the due bill less valuable and less liquid.
A hotel, entertainment venue, airline
company, graphic design firm or anyone with goods or services to sell now for delivery in
the future can gain with due bills. One thing they can redeem their credits for is
advertising to generate cash business. An entertainment business could trade tickets
to future events for promotion now. An airline could trade future seats in exchange
for advertising now. The same is true for practically any business service or hard
good. The benefit is really two-fold, you sell future goods now and you buy things
on trade which you would normally pay cash for.
For example a toothpaste factory running at
87 percent of capacity has the same overhead as running at 100 percent of capacity.
By selling a due bill on that future capacity, the manufacturer could spend the earnings
now while delivering the goods later. It is like an interest-free loan, alternative
financing at it's best.
This can be an excellent way to improve
business, but care is paramount. Imagine that you make widgets and you have sold
your excess capacity to produce several thousand units through a due bill. The due
bill passes through a number of hands and winds up in the possession of the competitor of
one of your main customers. You sell regularly to ABC Retail but their competitor
XYZ Stores gets hold of your product and sells them at at ridiculously low price to
embarrass ABC Retail. By losing control of the deal, you could lose your best
customer. When liquidating excess, you want the goods to go away quietly without
disturbing your existing channels of distribution. You don't want competitors to get
a hold of it and especially don't want regular cash customers to buy it for barter either.
Cash is king but selling for cash is not the
only goal. A liquidator can buy your excess inventory for cash but a significant
loss. By selling the goods through barter you receive full book value thereby
putting the sale on the books profitably and making the goods go away quietly. Now
you can save your kingly cash and buy what you need with barter credits.
Craig Kaufman is President of Kaufman and Associates, Inc. a Chicago-based
consulting group that assists businesses in corporate barter matters. He can be
reached by phone at 773-334-1631 or by fax at 773-334-2549
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