Overcoming Deficits In The Barter
By Jim West
In the last thirty years that I have been in and around the
commercial barter industry, a common problem among trade exchange
owners has been the existence of a deficit in their exchange. By
definition, a deficit happens when the liabilities of a trade
exchange (positive trade dollar balances) exceed the assets
(inventory or negative trade dollar balances).
When a barter exchange opens its doors for the first time, the
operator�s challenge is to begin signing members. Since revenue for
the exchange is derived from the movement of trade dollars, the
motivation is to get as many trade dollars on the street as quickly
as possible. Where do these new members get trade dollars to spend?
The only two methods that are considered fiscally sound are to
either acquire hard goods into inventory and issue trade currency
when you �put gold into Ft. Knox� or grant lines of credit. Since
most exchange operators find that managing a warehouse of inventory
can be costly and unprofitable, the most accepted way of
capitalizing a trade exchange is by granting credit lines. This is
commonly known as a zero-debit accounting system.
In reality, a barter exchange is nothing more than a mini
pseudo-bank, the difference being that it does not accept cash as
deposits nor is it regulated by the Federal Reserve. With that in
mind, the balance sheet of a barter exchange should be managed much
like a bank�s balance sheet. The members deposit goods and services
in lieu of cash and receive a credit in their account. That credit
becomes a liability to the �bank� and the member/depositor becomes
in essence a creditor of the exchange.
When a line of credit is granted to a member, they become a debtor
to the exchange and their debt is an asset/receivable which offsets
the positive balance liabilities/payables. In a zero-debit
accounting system, the balance sheet should actually balance. If the
operator is making a profit there should actually be a net worth,
whereby the assets have been managed in such a way that they exceed
Should an exchange operator ever decide to go out of business or
retire, in theory all positive and negative balances should be able
to net out against each other, leaving a zero balance in all
Because barter exchanges are not regulated by any banking authority,
there always exists the opportunity for abuse. The barter industry
has seen unscrupulous operators who view owning a barter exchange as
a license to steal, because they can actually get away with printing
In contrast, I have found that some exchange operators are actually
ignorant of how their own company is supposed to work and don�t have
a clue what a deficit is or how it came to be. This second group is
who this article is written for since we can assume that the first
group already knows what they are doing.
How does a trade exchange get into a deficit position? This usually
occurs when the operator loses control of trade spending, and begins
issuing trade dollars at will for whatever business expense comes
along, such as for payroll, for new membership incentives, or for
their own personal spending. Their rationale is usually that they
are earning trade every month in the form of some kind of monthly
accounting fee and it will eventually balance out.
What they don�t realize is that they are actually printing money and
spending more than they earn. Over time, this reckless practice can
snowball until the resulting deficit is so large that it is out of
control. On a larger scale, our own federal government is a good
example of what happens when deficit spending runs rampant.
Another cause for a deficit is mismanagement. This usually runs
alongside deficit spending, but it can sometimes occur on its own.
Not having a reserve account for bad debt can result in a deficit.
When a member goes out of business with a negative balance, the
exchange can end up with a loss. Write downs on obsolete or inflated
inventory can also result in losses.
Were the members (depositors) to get wind of the existence of a
large deficit in their barter exchange, what could result would be
similar to a run on the bank and the ensuing chaos that usually
results when a real bank defaults on its obligations. Trading could
come to a standstill and even worse, a group of �creditors� could
get together and force an exchange into bankruptcy if there were
enough discontented members.
What many exchange operators with deficits don�t realize is that if
they were a real bank, the regulators would have shut their doors
long ago, and worse yet, they would be behind bars.
The first action that must be taken to reverse the deficit process
is one of acknowledgment. The operator must come to grips with what
has occurred, how the problem developed, and what behavior needs to
be changed to prevent it from continuing. Once an assessment of the
problem has been made, the extent of the deficit and a true balance
sheet created, a solution can then be implemented.
The traditional method for erasing a deficit has been to pump new
product into the system, which when purchased at wholesale by the
operator could earn more trade dollars with a retail markup. This
requires a cash commitment on the part of the operator to acquire
salable hard goods, and could also compound the problem further if
new trade dollars are issued to acquire products in bulk on trade.
This process can be time consuming and many operators who have
already made a mess of things are usually not equipped to ramp up a
merchandising division like this and make a profit. Also, the result
of earning-back trade dollars and erasing them from the balance
sheet can be a huge reduction in the amount of currency in
circulation, and therefore an impact on trade volume and fees. While
in theory this could work, it is not the method that I would pursue.
The first problem that must be addressed is the level of trade
spending going forward. Here�s where a simple budget is needed. If
the monthly trade income is not sufficient to cover the monthly
trade expense, some adjustments are needed. Trade compensation to
employees, operating expenses paid in trade, and an allowance for
discretionary trade purchases must be covered by trade income. If
trade income from monthly accounting fees is not sufficient to cover
these expenses, either the expenses must be reduced or trade income
must be increased.
recommend a combination of both. Abuses in trade spending must be
curtailed and strict guidelines enforced. Treat trade like it was
cash, just like a member�s negative balance would be if they closed
their account. Then try adding a trade component to the transaction
fee schedule, by perhaps reducing 1% of the cash fees in exchange
for 2.5% in trade or by offering some new value to the member in
order to increase the fees by a trade portion.
The member will welcome a reduction in the cash fee portion and will
appreciate your willingness to accept trade, which reaffirms the
value of your own trade currency. This new trade income will serve
to balance your trade spending budget going forward as well as
whittle down the deficit over time.
The concern over the potential reduction in cash income can be
overcome by a look at the whole principle of Reaganomics that turned
our economy around in the �80s. A reduction in the cash fee
component could very well result in higher monthly trade volume as
members view the service as being more affordable, which further
translates into higher monthly fee income.
bigger impact on the deficit dilemma can also be achieved by taking
trade dollars out of circulation and thus reducing the liability
exposure. No, I�m not advocating confiscating members� balances.
This method doesn�t really remove the liability from the balance
sheet, but it does hold it in suspense accounts with the member�s
consent to minimize the potential for a �run on the bank� and the
resulting gridlock that may ensue.
There are two industries in particular which provide an intangible
product that is paid monthly over time: media and real estate. Most
advertising contracts are for time periods of up to a year. Real
estate leases can be for as long as three years or more. Both of
these industries have huge excess capacities right now and their
product is perishable. And, these types of companies usually employ
an accrual accounting system which means that they only want to be
paid monthly as the service is rendered instead of in advance.
However, because you want to make sure that the advertising member
or lessee member meets their future trade obligation on their
advertising contract or lease, the opportunity exists to have them
prepay the entire contract in trade and then deposit those funds
into a suspense account from which the monthly obligation would be
This accomplishes several things for the exchange. It generates huge
trade volumes on the buy-side resulting in a spike in both cash and
trade income. As well, it removes large amounts of trade from
circulation into suspense accounts and releases it back into
circulation in manageable increments. Thus serving to reduce high
balance accounts in a hurry which are the worry of many exchange
There will be times when a member wants to advertise or lease real
estate without the trade funds to fully do so. That is fine. Here�s
an opportunity to grant a line-of-credit and start backing up the
exchange�s liabilities with like-kind assets. Just make sure that
you do proper due diligence on your member/debtor, and end up with a
well secured receivable.
You can also attract new members easily when you have the right kind
of media and real estate to offer. Granting credit lines to new
members that must be paid back with new business creates additional
activity among existing members, generating an increased level of
cash and trade fees.
What kind of media and real estate is ideal? Depending on the size
of your exchange�s deficit, go after media which requires a sizable
monthly commitment. While we believe outdoor is the most effective,
it is also the most costly even though it is also the most
economical in cost per prospect reached. Find real estate firms that
own and operate shopping centers and office buildings.
All you have to do these days is drive around and notice all the
vacant spaces. A retail or office lease directly offsets a member�s
monthly cash expense so it would be in great demand. The real estate
company needs incremental trade income to offset their monthly
maintenance costs because they are hurting for cash flow. When you
consider the big picture, this is a win-win for all concerned.
Back To A Balanced System
With these processes in place, you are on your way back to a
balanced economy within your exchange. It�s important to always
think of yourself as a bank, and more importantly, as a banker. Be
ever aware of your liabilities to your members. They have entrusted
to you thousands (maybe even millions) of dollars in assets to
manage, and you have a fiduciary obligation to do so responsibly.
As you progress towards fiscal soundness, be thinking of ways to
demonstrate to your members the commitment you have made towards a
balanced system. Who knows, you may someday be proud enough to
actually publish your balance sheet for your members� review, much
like a bank does. There�s nothing like accountability!
West is a veteran of the barter industry and currently serves as
Corporate Barter Director at Olympus Media, LLC.
You may contact him at