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Commerce · III.03 · MMXXVI · daylight

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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter III.03 · Complementary and Local Currencies

For the person with a P&L, a working capital line and a signature authority. This is not a workbook about civic currencies. It is a workbook about settling trade with your own network at a lower cost than your acquirer charges, using an instrument that has run continuously in Switzerland since 1934.

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THE PREMISE, STATED COMMERCIALLY

You already operate a complementary currency. It is called trade credit, you issue it every time you invoice on thirty days, and it is the second largest source of short-term finance in most economies after bank lending. What you do not do is net it multilaterally, which means every chain of three or more counterparties settles in cash at every step, and every step costs you working capital and an acquiring fee.

A clearing circuit is trade credit that nets. The commercial proposition is three lines:

1. Receivables that settle faster, because the payer's constraint is not cash but a credit line you have already agreed.
2. New revenue from members who could not otherwise buy, which is the countercyclical property Stodder measured in Switzerland: the circuit is used more when bank credit contracts.
3. A settlement cost below your card acquiring cost, if — and only if — the circuit's velocity clears a computable threshold.

The third line is the one your CFO will test, so it is the one this workbook spends its time on. The chapter's arithmetic gives a break-even velocity of 3.33 turns a year at a 3 percent fee test for a 400-member circuit. Every exercise below leads to your own version of that number.

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PART ONE — DISCOVERY

Days 1–30: your existing circuit, which is already there

Exercise 1.1 — The trade graph (one week, with your financial controller)

Pull twelve months of accounts payable and accounts receivable. Build one table: every counterparty, amount paid, amount received.

Then answer three questions.

1. How many counterparties appear on both sides? These are your bilateral nets, and you are probably settling both directions in full.
2. How much value sits in closed loops of three? A pays B, B pays C, C pays A. Your ERP will not show you this; you will have to look. Iosifidis and colleagues found these cyclic motifs to be the structural signature of a working circuit.
3. What is your total annual acquiring and payment processing cost? Get the figure, not the rate card. It is your benchmark and the whole business case is measured against it.

Exercise 1.2 — The five-place sweep (one week)

Where is settlement already the binding constraint rather than demand?

The last row is the number your board already cares about. The circuit's entire commercial case is that it reduces it.

Exercise 1.3 — The appreciative board conversation (one session)

Do not open with a proposal. Open with this question, and let it run:

"Tell me about a time we did business with somebody on terms that were not standard cash terms, and it worked out better than standard terms would have. What made it work? What would have broken it?"

Every board has two or three of these. They are your precedent, they are already approved, and they are far more persuasive than Switzerland.

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PART TWO — THE ARITHMETIC

Days 31–45: the five numbers

Exercise 2.1 — Size the circuit (one week)

Using the chapter's two structural rules, drawn from Sardex's operating practice:

  credit line     ≈  1/100 of each member's annual turnover
  acceptance cap  ≈  1/10  of each member's annual turnover

For a 400-member circuit at a median member turnover of 900,000:

  M  credit mass at full draw      400 × 9,000   =   3,600,000
     backing at acceptance cap     400 × 90,000  =  36,000,000   (20×)
  C  operating cost                6 operators   =     360,000
  T  turnover at V = 8             3,600,000 × 8 =  28,800,000
  c  cost ratio                    360,000 / 28,800,000 =  1.25 %

Exercise 2.2 — The velocity sensitivity, for your board (half a day)

Run the only table that matters, and put it on page one.

V* = C / (0.03 × M) = 3.33

Now do it with your own numbers, and then do it twice more: once at half your expected membership, once at half your expected velocity. If it fails both stress cases, the circuit is too small, and the answer is a larger founding group rather than a better pitch.

Exercise 2.3 — Benchmark c against what you already pay (2 hours)

Put three figures side by side.

• Your blended card acquiring rate.
• Your cost of working capital on the days of float the circuit would remove.
• The circuit's c at your target velocity.

If c is below the first two combined, you are not proposing a community initiative. You are proposing cheaper settlement, and that is a conversation with the treasurer rather than with the sustainability committee. Present it there.

Exercise 2.4 — The honest negatives, written by you (2 hours)

Before anyone else finds them. Three, at minimum:

1. The velocity risk. Bristol's currency turned over 1.36 times a year and its cost ratio was 15.75 percent. If your members buy from a short list and sell to nobody, you will reproduce that. State the composition test: every member must be plausibly both a buyer and a seller inside the circuit.
2. The concentration risk. In a small circuit, one large net seller accumulates credits with nowhere to spend them and becomes the scheme's critic. Name who that will be and what they will buy.
3. The closure discipline. Write the number below which you will close it. The chapter's example is 3.33 turns a year. Write yours in the board paper before launch, because a closure decided in advance is governance and a closure decided afterwards is a loss.

Exercise 2.5 — What the currency is bolted to (2 hours)

Every durable circuit in the record is attached to something that earns independently. Bank WIR's net interest income was CHF 67.8 million against commission income of CHF 19.202 million — the lending business is 3.53 times the fee business, and it carries the currency. Instituto Palmas earns 72 percent of its revenue, 52 points of it as a banking correspondent. Sardex charges a subscription. The Chiemgauer takes two points of a five-point redemption fee.

Answer one question in writing, for your own proposal: if the subscription revenue fell by half, what else pays for the operators?

There are only four honest answers and you should choose one before launch: an existing member service that already earns; a payments or brokerage fee you are already charging elsewhere; a balance sheet with a spread on it; or an explicit decision that this is a marketing cost carried by the association's core budget, with a named line and an annual review.

The fourth is legitimate. It is only dangerous when it is unstated, because an unstated subsidy is withdrawn by whoever inherits the budget, and they will do it in a year when nobody is watching.

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PART THREE — DESIGN

Days 46–60: the instrument

Exercise 3.1 — Draft the terms (one week, with legal and treasury)

Non-convertibility is the design, not a compromise. Bristol Pound estimated at least £50,000 in legal fees to enter the e-money regime. A circuit nobody can exit into cash usually stays outside it. Take your own advice from counsel early and in writing.

Exercise 3.2 — The audit and accounting conversation (one meeting, month one)

Go to your auditors before you launch, not after. The conversation is short: credits receivable are trade receivables, credits payable are trade payables, and they net within the circuit at the reporting date. Your accounting policy note is one paragraph naming the circuit and the settlement basis.

Ask for the paragraph in writing. It costs you one meeting and removes the single most common reason these proposals stall at year end.

Exercise 3.3 — Staff to velocity, not to membership (one decision)

The most expensive error in the record is hiring people to sign members up and then wondering why turnover is flat. The operator's job is brokerage: knowing that member A buys what member B sells, and making the introduction.

Write the job description with the objective in it: circuit velocity, measured monthly as turnover over outstanding credit. Pay against it. Six operators at a fully loaded 60,000 is the chapter's worked case; yours will differ, and the ratio of operators to members is a decision you should make deliberately rather than inherit.

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PART FOUR — DESTINY AND DELIGHT

Days 61–90: launch and hold

Exercise 4.1 — Recruit the dense twenty first (two weeks)

Not the twenty largest. The twenty with the densest existing links to each other from your Exercise 1.1 graph. A circuit that clears in week one recruits itself; a circuit of strangers needs marketing, and marketing is C.

Exercise 4.2 — Into the reporting pack (one conversation)

Five numbers, monthly, on the standing pack: M, T, V, C, c. Anything reviewed monthly persists; anything reviewed by exception does not. Getting this onto the pack is worth more than any presentation you will give.

Exercise 4.3 — The second owner (before you need them)

One executive sponsor is a hobby. Recruit the second before the first result, and recruit them by giving them the credit for it.

Exercise 4.4 — Delight, for a firm (ongoing)

The pleasant part is real and it is commercial. Members like being introduced to customers. Publish the introductions. Name the brokers. A quarterly note listing which members traded with which for the first time is the cheapest marketing the circuit will ever have, and it directly raises V, which directly lowers c.

Exercise 4.5 — The one page, the one person (day 90)

Baseline, intervention, result, and what it implies at ten times the size. Delivered to whoever controls the next allocation. Not the board, not the all-hands. One person, one page, one number — and the number is c against your acquiring cost.

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THE FAILURE MODES, NAMED

So you can see them coming

• The consumer trap. Members who buy from a short list and sell to nobody. Velocity collapses toward one; the ratio follows.
• Cost that does not scale. If C is set by headcount and headcount rises with members rather than with turnover, growth never improves the ratio.
• Free redemption. If credits can be cashed out at par and at will, the circuit becomes a slow, expensive payment processor.
• The unpublished ratio. If nobody computes c monthly, the scheme will discover it is unviable in year seven rather than year one.
• Grant financing. It is not a revenue model. Bristol raised £1.2 million over eight years, generated no surplus, and closed.

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THE NINETY DAYS ON ONE PAGE

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BOARD PAPER TEMPLATE

Proposal. Establish a closed multilateral clearing facility among [N] members of [association], operated by [entity], funded by an annual subscription of [fee].

Commercial case. Settlement cost of [c] percent of circuit turnover against a current blended acquiring cost of [x] percent, plus [y] days of working capital released. Incremental revenue from members currently declined on credit grounds: [z].

Structure. Non-convertible unit at 1:1. Credit line 1/100 of audited turnover; acceptance cap 1/10. No interest. Twelve-month work-off. Full VAT transparency. Association is netting agent and guarantees nothing.

Accounting. Trade receivables and payables, netting at the reporting date. Auditor's note attached.

Risks and mitigations. Velocity below target — composition test at recruitment. Concentration in one net seller — named purchase pipeline. Regulatory reclassification — counsel's opinion attached.

The number that decides it. Circuit velocity in month twelve. Below [V*] turns a year this facility does not cover its own cost and we will close it.

Decision sought. Approval of [C] of annual operating cost for a twenty-four-month term with a hard review at month twelve.

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APPRECIATIVE QUESTIONS FOR YOUR LEADERSHIP TEAM

1. When have we done business on non-cash terms and it worked better than cash? What made it work?
2. Which of our customers wants to buy from us and cannot pay on time — and what would they pay us in instead?
3. Where in our payables is there a closed loop of three we are settling twice?
4. If settlement stopped being a constraint for our top fifty counterparties, what would we sell next quarter that we cannot sell now?
5. Who here would own circuit velocity, and what would make them want to?
6. What is the number below which we would close this, and are we willing to write it into the paper today?