Whether or not a business decides to transact all or part of its business by way of barter, rather than by cash payment, is a decision for the directors but, in making that decision, directors need to remember the old business adage – “Cash is King”.
There can be advantages in using the barter system to settle transactions between your business and your clients, but you will still need to have sufficient cashflow.
There are still wages and taxes, including GST on the barter transactions, which you will have to pay using money and there will be other goods and services that you require that you cannot make payment for using barter credits.
If you cannot find enough business expenses that can be settled with barter credits you can end up with a high level of credits and no simple way of converting those credits to cash at the full value.
In a case we have been involved in, the company, which provided services, used a barter system as the means of payment for some of its clients. It used some of the credits to purchase goods from other members of barter group and then tried to realise those goods for cash.
When we were appointed, the company had a large quantity of items purchased using the barter system with an estimated purchase value of about $60,000. One item alone had cost in excess of 15,800 barter dollars to purchase – it sold for just over 25% of that amount in cash at auction.
We are not advocating for or against the barter system. Whether or not your business will suit the barter system will depend on a number of factors, including the ability to use the credits for business expenses and your ability to manage the process.
But, if your business is struggling to meet its obligations to pay wages and taxes and to make payment to creditors who require payment in cash then it is better not to have a substantial amount held in goods that were purchased with barter credits and that are not the type of items your business sells, as you may have problems converting those goods to cash and anything like the purchase value.
If you are having cashflow issues or have any concerns about the solvency of your company please contact one of the team at McDonald Vague.