Contra, barter, trade outs, exchanges – they are all the same thing. Exchanging goods and or services is older than currency and it's still used today, especially in hospitality. How you can use this tool effectively and how to properly record these transactions on your books is the meat on the stick in this article.
First thing you need to know that typically stops most people from pursuing trade out agreements is they do not have a direct positive impact on your profit and loss statement. The trade out itself if it's recorded properly will not reduce expenses. It only saves you cash. So, if cash flow is a concern and let’s face it, it is for many hospitality operations especially seasonal ones, then contra agreements might be something to consider. Lastly before we get into the body of this piece is to do your local homework and get the tax facts straight. Each jurisdiction is different. What I will describe here is a generic version but don’t rely on the process as it's laid out here. Get the local facts on exactly how it is treated in your location.
Typically, in the hospitality business we trade rooms and food and beverage for advertising; this is by far the most common. The second most popular trade I have seen is our services for transportation – air, rail and car rentals. The third is health club memberships. In all three instances the advertising aspect is the main driver on the hotel side.
It goes like this.
How can I get advertising on my regional radio station to drive room nights? Or, how can I get an ad in the airlines magazine or how can we participate in a promotion that features our hotel as a prize? How can I get the local popular health club members to use my bars and restaurants? The answer many times is let’s try and set up a trade out with one of these organizations so we can get some increased visibility without having to use cash.
We can use our “unused” room inventory and our capacity in food and beverage operation to help drive more sales of rooms and F&B. Remember, if we don’t occupy a room tonight or one night next week, we can resell that inventory. This is a main driver for hotels to use trade outs to help boost business. In my experience it’s also a tool that General Managers and Directors of Sales love to use because they get to “make a deal” and for most of them this is an exciting prospect.
But beware of the rules and the proper treatment of the transactions before you jump in with both feet. First off, your state or national income tax rules probably preclude your business from treating the trade out any differently than any other sale. Same with your municipal sales tax rules. You will have to come good on all taxes due just like complimentary rooms in most locations. I strongly recommend checking with your accounting leader before any deals are made. I can’t tell you how many times I have had to “counsel” my fellow executives on the proper treatment of these exchange agreements that caught them completely by surprise. Don’t think you can simply trade your stuff for theirs without paying the piper. Do this and you're both liable for some trouble.
First off, when we trade it's important to know that rooms and F&B are very different from a cost point of view and, as such, the rooms typically should trade on a 1-1 basis at rack pricing with your trading partner's rack prices. Or we both agree on a price that’s going to stand up to scrutiny, certainly an exchange price on our side that is equal to or above our average room rate. If it’s below that level, then local taxing authorities will ding you for the difference, plus a penalty and interest. Don’t be tempted. Second, where we are trading F&B you are going to want to get a 2-3 times exchange. F&B costs plus labor are extremely high and therefore we want to ensure we get additional advertising or travel as a result.
In the F&B trade example let’s say you are trading a banquet for 100 clients of the radio station and the bill is estimated at $10,000. You are going to want to bargain for at least $20,000 to $30,000 worth of advertising because you have a considerable cost associated with producing the food and staffing the event. Their costs to produce and run the adds are much less. Be a savvy negotiator and get more.
Back to the room scenario and, in this case, we have agreed to exchange two suites for two nights and 30 superior rooms for two nights. The radio station will run a series of ads over a two-week period as promotion to give away two 2-night suite stays to the lucky listener. That is what the hotel gets: The radio station is going to use your hotel and the 30 superior rooms for an event for their staff and owners.
The question is how we treat all of these transactions.