Cash is great as it attaches an instantly recognisable extrinsic value that all those within a given society have agreed upon. This makes dealing with each other, whether it be in businesses or individuals much easier and streamlined. However, it does have its disadvantages.
If you are a cash-poor business it does not give you much wiggle room to grow without going into further debt. This is where a good contra deal can come in. Contra Deals involve trading items or services without the medium of cash. They are good for business efficiency and relationship building, but they can be difficult to value for both parties.
In today’s blog, we have a look at some of the different methods that can be used for valuing a contra deal and its worth to your business.
1. What would you have to pay for the contra deal?
This may sound basic but it is one of the first questions you should ask. When offered an item or service on contra, think about how much it would cost your business in a standard transaction.
If the cost is something that would be manageable and beneficial to your business, you should have a good contra deal. If however, the cost of buying the product is not worth it and does not fit in with your business model, consider a different method.
Whilst it may be an attractive prospect to get a load of printers as part of a contra deal unless you have a way of selling them you will lose money in the long run. These costs can come in terms of time, storage fees, and the opportunity cost of conducting other business and activities.
2. Have a deeper look at the opportunity cost of the contra deal
As mentioned above, a contra deal has an opportunity cost. Not only in terms of the service or product that you are giving up but also the time that could be spent on other activities that could grow your business.
You could, for example, use the product or service you are offering to seek out a contra that could offer better benefits for your business. If the storage or time costs for holding off on the contra deal are not too expensive, it may be worthwhile to hold out for a better deal that would offer better value for your business. Considering this and other opportunity costs will help you work out the actual value of a potential contra deal. Remember that reduced storage costs of getting rid of ‘dead-stock’ should also be considered as a positive for a good contra deal.
Make sure you have an understanding of the contra dealing fundamentals
Taking into account the cash cost of a potential contra deal and the opportunity cost of taking part will help you work out the true value of the cashless transaction. In addition to an understanding of how to value contra deals, you should also have a good understanding of how to structure them and how to find them. This will help you get the most out of this interesting method to grow your business without compromising your cash.