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Financial Advantages of Straight Trade
Let's analyze the economic impact. The company received $1,000,000 in advertising value and gave up
$3,000,000 in product. However, this product was a wasting asset that was only worth 20% of wholesale
($600,000) in cash.
In this example the company received INCREASED ECONOMIC VALUE and HEALTHIER FINANCIAL STATEMENTS. The increased economic value resulted from the fact that the company received
$1,000,000 in value (advertising time) for the $3,000,000 in excess product, as compared to the
$600,000 in cash they would have received by liquidating the product. This amounts to $400,000 in
increased value.
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STRAIGHT TRADE |
FULL VALUE TRADE |
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Original Wholesale Value |
$3,000,000 |
$3,000,000 |
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Liquidation Value |
$600,000 |
$600,000 |
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Trade Value Recieved |
$1,000,000 |
$3,000,000 |
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Cash Budget Required |
$0 |
$9,000,000 |
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Cash Flow Savings |
*DNA |
$3,000,000 |
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Increased Profit |
$400,000 |
$2,400,000 |
*PLEASE NOTE: Cash Flow Savings do not apply to the Straight Trade program because the
company did not plan to advertise
and therefore did not budget an expense for advertising.
Compared to the Full Value Trading program, Straight Trade has some economic disadvantages. In Full
Value Trading, the excess inventory can be booked at full wholesale value. In Straight Trade, the
transaction can only be booked at the value of the advertising received.
PLEASE NOTE: Guidelines for booking a non-monetary transaction are clearly set forth in Accounting
Principles Board opinion #29, paragraph 18, which states: "...accounting for nonmonetary
transactions should be based on the fair values of the assets (or services) involved...Thus, the cost
of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the
asset surrendered to obtain it...The fair value of the asset received should be used to measure cost if it
is more clearly evident than the fair value of the asset surrendered." Fair market value is determined,
according to paragraph 25: "...by referring to the estimated realizable values in cash transactions of
the same or similar assets, quoted market prices, independent appraisals, estimated fair values of
assets or services received in exchange, or other evidence..."
In the example we have used throughout, the value of the advertising received can be easily verified through the company's advertising agency and is therefore usually used for booking the transaction.
Despite its shortcomings when compared to Full Value Trading, the Straight Trade transaction still
delivers better economic value than cash liquidation. The simplest way to demonstrate this is to examine
the bottom line value received for the $3,000,000 inventory. A cash liquidation would have returned 20%
of the value ($600,000), but the Straight Trade transaction returned just over 33% ($1,000,000).
While Straight Trade is financially more beneficial than cash liquidation, most companies select it for the
marketing benefits. In the example we used, a company with a $3,000,000 surplus inventory and with no
cash to spend for advertising was able to buy $1,000,000 in advertising! If designed properly, this
advertising campaign could increase sales of the current product line and head the company toward a more
profitable future.
A Few Words of Warning
In order for these economic benefits to be fully realized, the Asset Recovery program must be carefully
monitored to make sure of two important criteria. First, the advertising received through barter must be of
the same quality as the advertising that would have been purchased for cash. Second, it is important to
confrrm that the rates charged for the advertising are the same rates that would have been paid if the
campaign had been purchased for cash. Obviously, if the rates are inflated in the barter program, the
company would be paying more for the ad campaign and the economic advantages would be seriously
diluted.
TAHO satisfies these concerns by working closely with the client and its advertising agency. TAHO acts
as the media buying company and operates under the guidance and supervision of the agency. It is the
agency that determines the advertising parameters (the quality of the advertising). TAHO purchases the
time or space stricty according to these parameters. The agency approves everything before it runs.
In addition to setting the parameters, the agency also provides TAHO with a benchmark budget for the
campaign. This benchmark is the price the agency thinks it would have paid if the campaign were purchased for cash. TAHO must deliver the campaign at the benchmark price consisting of a cash portion and
a trade portion which add together to equal the
benchmark budget. With the agency acting as the highly experienced supervisor, the company can be
assured of receiving the full impact of the economic benefits inherent to barter.
One Final Question
It should be clear that the key to delivering the financial benefits of barter lies in the barter company's
ability to acquire specific media at a cost less than when that media is traditionally purchased for cash. A
logical question, therefore, is how can TAHO buy media cheaper than regular advertising agencies?
The answer is that TAHO does not buy cheaper than agencies. Instead, we pay for media differently by
using barter. Ordinarily, media buyers try to negotiate the best possible rates (called the "street rates").
TAHO's media buyers are experts at not only negotiating the lowest possible street rates, but also at
including some form of barter as payment for the advertising. In order to make sure that the media runs as
ordered, TAHO buyers agree to some cash when making their buys. Without jeopardizing the delivery of
the campaign, TAHO's buyers mix as much products and services as possible from our vast inventory into
the payment formula.
As an example, the $1,000,000 spot radio campaign used in the example above might be purchased by
TAHO's media buyers for $200,000 in cash and $800,000 in products and services (trade) from our
inventory. If so, then why did TAHO charge the client $600,000 in cash and $400,000 in product? The
reason is that in this example TAHO's total cost for the $1,000,000 campaign was $600,000. This cost
consisted of $200,000 in cash plus $800,000 in trade. However, the $800,000 in trade might only have
cost TAHO $400,000. Therefore, TAHO's actual total cost for the advertising was $200,000 in cash and
$400,000 for the trade portion. TAHO charged the client $600,000 to cover its cost and received
$400,000 in product as profit. If TAHO liquidated the $400,000 in product, it would receive $80,000
(since the product was only worth 20% of wholesale). In reality, TAHO would probably liquidate a
portion of the inventory and would use the balance for trading with the media.
TAHO's ReMarketing Expertise
We stated earlier that improper liquidation of a company's product or service can cause serious problems.
TAHO has forty years of experience in developing remarketing programs that enhance a company's image
rather than tarnish it. TAHO will contractually agree to remarket an inventory only in a manner approved
by the client. For particularly sensitive merchandise, TAHO has several methods that enable the client to
retain complete control over its product until it is shipped to an approved buyer.
In Addition to Advertising...
Asset Recovery programs normally revolve around the purchase and delivery of advertising. Most manufacturers have significant advertising budgets which can make use of larger excess inventories through
barter. Also, since radio and television stations and magazines own a highly expendable asset (the value of
unsold time or space can never be recovered), they are more inclined to trade than are most other
industries.
However, an unsold hotel room, empty airline seat ocean cruise cabin, or a rental car still sitting in the
company parking lot are all examples of excellent trading opportunities. At the end of the day, none of
these unsold or unused assets can be recovered. As a result, the hospitality industry can be used in Asset
Recovery programs. However, most companies do not spend as much money on travel as they do on
advertising. Therefore, the size of an excess inventory recovered through trading for travel services is
relatively small compared to trading for advertising. Most of TAHO's clients use advertising as the core of
their Asset Recovery programs and use travel as a supplement to this core.
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A Brief History || Financial Advantages of Barter || Delivery of Advertising || Trade Credits || Credential Letters || Why Barter || Request Client Reference || Links ||
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An International Trading Company Established in 1954
1330 Centre Street, Box 69, Newton Centre, Massachusetts 02159
617-965-4400 FAX 617-527-6005
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