The key to understanding trade and having it work for you is knowing your trade cost. This concept, when properly understood, will give you access to leverage rarely accessible in the cash world. What’s involved? Simply determine your cost to earn your Trade Dollars.
Trade cost: the actual cash outlay required to take on a new client. Also equal to your variable costs.
When a business joins Trade Exchange Canada, it does so for the express purpose of attracting extra business. This extra trade business is meant to be used as “filler” for down times, as an alternative source of income for slow times.
Being that you are already open for business anyway, filling your spare capacity with trade clients costs you very little. When a business owner joins Trade Exchange Canada they acknowledge their fixed costs such as rent, advertising, staff salaries etc, are in place already, and the only extra costs to take on a trade client are the variable costs to serve them.
Your variable costs depend upon what kind of business you are in. If you are a hotel owner, your variable cost is the cleaning for the room you’ve rented to your trade guest. If you run a restaurant, your variable cost is the cost of the food used to make the meal served to your trade client.
None of your fixed costs are calculated as part of your trade cost because you are open for business anyway. Only the variable costs incurred specifically for serving that client are required for calculation of your trade cost.
To calculate your trade cost, first ascertain what your variable costs are. For example, with a magazine business, the trade cost is roughly $100.00 per $1000 ad.
That includes the variable costs of paper, ink, editing, etc. It does not include fixed costs such as advertising, salaries, rent etc.
If the magazine charged $1,000 per ad, and the variable costs to provide the service are $100, the trade cost would be 10 cents on the dollar.
|Trade cost =||Variable costs|
|The trade cost = $100.00||= 1 = 0.10 = 10 cents on the dollar|
Therefore, it costs the magazine 10 cents on the dollar to service their trade client.
What Is Your Trade Cost?
Take a moment now to calculate your true trade cost:
Variable costs = ________ = 0. ___ = cents on the dollar to earn
Congratulations! With this information you now are equipped to utilize your trade dollar leverage in all aspects of your business. The first leverage technique we will review is buying retail at your wholesale cash cost.
How To Buy Retail at Your Wholesale Cost
Now that you’ve calculated your true trade cost, you can effectively translate that into your newfound wholesale cost on trade!
If your calculated trade cost is 40 cents on the dollar, deductive reasoning shows that every time you shop on trade you are in fact purchasing goods and services at 60 percent off.
Even though you are paying full retail price with your trade dollars, it only costs you 40 cents on the dollar to earn them. Your 60 percent margin allows you to effectively buy goods on trade at a 60 percent discount.
For example, if you are buying a $100 ski jacket on trade, and your trade cost is 40 cents on the dollar, your actual cost to buy the $100 ski jacket is only $40. You save $60 cash by purchasing the ski jacket with your trade dollars. This $60 discount is possible because you are earning your trade dollars off incremental business – business you would not have had otherwise.
This is the key concept that will make or break your success in the world of trade. Understand this concept and you will soon see how you can improve your own bottom line, reduce your expenses, increase your cash flow, and improve your quality of life dramatically!
Webster’s dictionary defines leverage as having a positional advantage in a situation. When we use what we already have (spare capacity, excess inventory, expertise) and leverage them within a trade exchange, we obtain far greater value than we would in the cash world PLUS we are conserving our cash in the process.
How much you are leveraged into your Trade Dollars is equivalent to how low your trade cost is.
As a member of Trade Exchange, you have access to a tremendous amount of leverage for the mere cost of your trading fees. This leverage comes from your business’ spare capacity or excess inventory, and is coupled with the tremendous benefits of being part of Trade Exchange Canada:
The more people you can expose your business to through trade, the greater the leverage you will have to increase your cash sales and grow your business.
Keep More of Your Cash
The simplest way to leverage your trade dollars is to use them for business expenses rather than using cash. Conserving cash and spending trade allows you to purchase at your wholesale cost, and keeps your cash liquid for when you really need it.
Let’s take a look at a traditional business operating in the cash world, and a business that is leveraged through trade:
Monthly Business Expenses One Time Expenses
Rent $10,000/month Web Design $15,000
Printing $3,000/month Legal Fees $12,000
Advertising $5,000/month Accounting $10,000
Phone $900/month Office furniture $25,000
Long Distance $500/month Equipment repair $11,000
Web Hosting $350/month Photography $5,000
Bookkeeping $500/month Catering $2,500
Total $21,000 Total: $50,000
A traditional cash based business would be paying cash for all these bills.
A trade business with a 50 cent trade cost could obtain savings of $5,250 per month by paying for half of the monthly bills with trade dollars!
$21,000 = $10,500 $10,500 x $0.50 = $5,250 savings per month
And a savings of $12,500 in one time expenses if paying with trade dollars:
$50,000 = $25,000 $2,5000 x $0.50 = $12,500 savings in one-time expenses
Add to that all the personal expenses that can be paid for on trade:
Monthly Expenses One Time Expenses
Massage $120/month Automobile purchase $5,000
Health Club $30/month Car repairs $2,000
Florists $40/month Photography $250
Theatre Tickets $50/month Boat purchase $5,000
Restaurant Scrip $100/month Chiropractor $300
Clothing $100/month Optometrist $400
Total $440/month Total $16,450
Assuming half of the services are available on trade, and your trade cost is 50 cents on the dollar, your total savings for personal expenses would be:
$110.00 per month & $4,112.50 in one time expenses
All this is possible by using your first form of leverage with Trade Exchange Canada: Conserving cash by spending trade. Not only can you use this leverage to purchase retail at your wholesale cost, you can increase your cash sales with back-end products and trade client referrals.