When Bartering is Not a Bargain in Business

Many businesses, especially entrepreneurs, rely on barter, ‘trade services’ or discounts as a way to get services for their business without having to shell out cash for them. This causes major pains if they continue the practice as they try to grow.

Examples are:

• Advertising such as logos and website designs
• Accounting services
• Auto repairs (yes, this happens)
• Consulting
• Virtual assistance
• Rent and office space

What can and does happen is that the habit of trade services continues on after cash is available.  While this  can be a great way to get work done for you during a cash shortage, there can be some long term effects that have significant impact.

People you are trading with eventually realize you have the money to pay them. . .

People you are trading with eventually realize you have the money to pay them, and they may begin to treat you not as a client, but as if they are doing volunteer or pr-bono work.  This results in them not giving you their best efforts, not meeting deadlines, and may lead to feelings of resentment.  But there are other significant impacts on your own business.  Let’s look at some actions that I recommend to clients.  In looking at these actions we will see what the impact is on your own business.

Bartering and trade services can have tax consequences.  Consult your tax professional as to how best to do this and where to keep your records.

Document all of your trade services: I mean create invoices within your own accounting software for services or material you gave away in trade.  Use your full markups on material and labor rates. Document, as in keep track of, all services and materials that they gave you. This may have to be done in a notebook or spreadsheet.

Document all of your ‘discounts’: By this I mean when you have looked at a job and then determine that for whatever reason you are not going to charge full price, make a note of what full price would have been and why you did not charge the full amount.  A real example of this is a client that spent 16 hours on a job that he normally charges 1.5 hours for, billed 4 hours and felt guilty.

Compare the results of your tracking and examine the reasons for the trade services or discounts.  As time goes on the numbers tell a significant story.  One of the significant impacts this exercise creates is the ability to look at patterns.  In the case of the 16 hours on a 1.5 hour job it came down to this – there was a pattern over time of all employees spending more time on getting the job done than there were billable hours.  Not good.

When we looked at the reasons behind this we saw:

• They wanted to make the customer happy – admirable, but if you are broke no one is happy.
• They were operating outside of acceptable industry standards.  In fact, within their own clientele they had redefined the standard of acceptable behavior and the client is now trained to expect many long hours on a project for a fraction of the price.
• Implementing some basic processes and procedures significantly reduced the ratio of freebie to billable, raising the effective hourly rate without having to actually raise rates.
• Key to the processes and procedures is not detail per-se, but having the employees understand why they are doing things this new way and helping them understand how their decision making process works.

If you still don’t have enough cash to cover necessary services, why?

• Is it that what you are doing in business is not paying off?
• Is it that you feel like you must continue to do business with a particular person or company in this manner out of loyalty?  Is that serving you well? Is it serving them well?
• Once you have the documentation done, do you have less brain clutter?

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Tagged as: Blue Collar Management, Burnout, Decision Making