IMGCAP(1)]Nearly every company has “problematic inventory.”
Maybe it’s an item that didn’t sell well, or one that was overproduced. It could be a result of packaging changes or inventory that is obsolete or short-code dated. Regardless of the reason, this problematic inventory doesn’t have sufficient cash value in order to meet book or wholesale value. This results in negative accounting issues such as write-offs or reserves—and decreased profits.
Unfortunately, the solution for most companies is either (a) contact a few liquidators and get the best price for the inventory, which is typically only 10 to 40 percent of book value; or (b) even worse, “We’ll figure it out later. There are more pressing matters to attend to right now.”
When a company doesn’t liquidate its problematic inventory, a number of other problems are created:
• Space problems: Excess inventory takes up floor space and prevents a company from offering newer products that appeal to customers. When excess inventory of an out-of-style or older product lingers, it restricts opportunities to design, produce and sell better products.
• Storage costs: The additional space used for storage of excess inventory means less floor space for selling. Plus, companies have to pay for utilities and other costs related to the storage. Employees who move inventory in and out of storage and organize it are also paid, which means companies are paying for labor to manage the excess inventory.
• Waste: Excess inventory that perishes or whose date has expired often simply gets thrown out. Reducing wasted inventory is critical for cost control and profitability.
• Reduced profits: Excess inventory naturally leads to reduced profit margins in most instances. Companies usually wind up putting excess items on clearance to induce buyers to purchase them at lower costs. Some companies even wind up selling extra inventory at prices below what they paid for them. This significantly lowers profit margins. Similarly, selling at lower prices means you are not bringing in as much cash as you would be by selling products at regular price.
Alternative Method for Problem Inventory
There is a powerful alternative that is increasingly being used to deal with excess problematic inventory: corporate barter. Corporate barter is the exchange of goods and services for problematic corporate assets on a non-cash basis through the use of commercial trade credit. Barter can be used to recover value from an asset that has lost some or most of its value or to fund new initiatives.
Companies with problematic inventory use barter for four main reasons:
1. They receive a much higher value for their problematic assets compared to cash liquidation pricing.
2. Trade is a way for companies to differentiate themselves from competitors and thereby gain new or expanded business.
3. They are protected from redistribution of problem assets into competing channels, which is common when such assets are disposed of through liquidators.
4. Potential purchasers pay reduced cash amounts to pay for competitively bid goods and services.
5. Costly and unnecessary carrying costs of non-performing assets are eliminated.
How Corporate Barter Works
A company identifies a problem asset—one that does not have sufficient cash value to avoid negative accounting issues. The company then identifies and quantifies trade credit usage areas—that is, what industries can be targeted for trade credit usage and how much trade credit can be expected in the transaction.
Potential purchasers provide a bona fide, non-qualified purchase offer—typically three to four times the cash liquidation value. The company then sells the asset under agreed upon restrictions. These restrictions might pertain to limiting redistribution of the assets to certain geographic areas—or to certain accounts such as noncompetitive accounts—or inappropriate selling environments such as discount or second-hand outlets. The company typically utilizes the trade credit for purchases including raw materials, capital equipment or professional services to reduce the amount of cash used in the transaction. Finally, the company monitors and measures their use of the trade credits to evaluate the value and benefits of the transaction.
Media, including TV and radio commercial air time and print advertising space, has long been the barter instrument of choice. But for companies—particularly those with no or limited media budgets—a powerful alternative bartering system is emerging: logistics barter, including ocean/air freight, less than truckload (LTL), full truck, intermodal and drayage. Virtually every company requires some form of logistics to do business, and logistics barter can typically be used by companies whose annual sales revenue is as little as $50 million.
Tax Considerations of Barter Transactions
Barter income is treated the same as cash income, and businesses that want to utilize corporate barter should recognize that it does not present any tax advantages or disadvantages. Barter cannot be used to avoid writing down the value of a depreciated asset.
A barter transaction cannot really alter the value of an asset simply because more is paid for that asset. With this in mind, barter should not be viewed as an accounting solution, but rather as an economic recovery tool that can only be realized as the trade credits received from the barter transaction are actually utilized and the client receives the value.
The IRS measures bartered exchanges by using the market price of the goods or services someone receives. In a swap, both parties have to list the market value of what they received as taxable income.
Benefits of Trading vs. Cash Liquidation
With the growth in the use of corporate barter, the paradigm for dealing with problematic inventory is rapidly evolving. The benefits of trade credits over cash liquidation are readily apparent:
• The trade partner pays a premium price for value—impaired, problematic assets of all types—typically three to four times the cash liquidation market price.
• Purchased assets are contractually agreed to be safely redistributed into noncompeting markets.
• Sale is immediate and trade credit is available upon signing. In the case of logistics barter, trade credits can be used to lower shipping costs.
• Cash needs are reduced.
• Space for excess inventory and storage costs are both reduced—as is waste from excess inventory that perishes or whose date has expired.
• Corporate profits are maximized.
Nicholas Isasi is executive vice president of
