Smart money is on Trade!
★Business people barter because they are able to finance the purchase of things they need out of additional sales of their own product or service.
-When a merchant buys something using trade dollars, he knows that the purchase is being paid for, in whole or part, by extra sales, excess inventory or spare capacity.
-Barter is a relatively inexpensive method of finance, based on exchanging less productive assets for valuable products or services.
-Through trade, a firm buys what it needs at the carrying cost of its inventory, thus reducing its cash outlay for the things it buys.
★In a cash situation, the cash spent by a merchant for the same purchase would have to come out of existing sales, not new sales. He has no assurance, when he makes a cash purchase that this will result in additional sales of his own product.
★Barter permits additional sales at one’s own normal price or carrying cost. Barter sales are incremental sales over and above cash sales. To take advantage of barter, a firm must have slow moving or non-performing assets to exchange, or excess capacity to take on additional sales.
★Business people also establish new business relations through bartering. They gain from an intangible web of referrals, advertising, and associations that generate both additional cash and barter business.
★In the final analysis, the most advantageous way for business to finance their purchases is through additional sales of their own product and unused resources.