Archive for October, 2011

Credit-Based Accounting System

Tuesday, October 25th, 2011

One of the most significant features of our sweepstakes platform is the unique way that accounting is handled. The system uses what we call The Credit System. This system provides an enormous advantage over every other sweepstakes platform on the market. The accounting system is such a significant feature that we refer to it as one of the Three Pillars that support the PromoGames Sweepstakes Platform.

To review, these THREE PILLARS include:

  1. A Web-Based Sweepstakes Platform
  2. The Credit-Based Accounting System
  3. A Multi-Tiered Distribution System

The credit system is briefly explained in another article on our site about Product Licensing. The purpose of this article is to drill down with a more thorough explanation of our proprietary credit-based accounting system and point out why it is such a huge advantage over any other method of accounting and payment.

The CREDIT SYSTEM uses a STANDARD INVENTORY MODEL. As you compare this accounting method to that of any standard product in a store, you will find the model SIMPLE, STRAIGHTFORWARD, and INTUITIVE.

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EXAMPLE: Let’s say that you are a Business Owner selling Snickers bars. And let’s assume that you buy Snickers bars from your candy Distributor for 60 cents each. Let’s also assume that you sell Snickers bars to your customers for $1 each. Finally, let’s assume that you have 100 Snickers bars in your store (inventory). I know this is starting to sound like a bad word problem, but bear with me.

If a customer walks into your store and purchases 10 Snickers bars, how much money will you have in your cash register?
Answer: $10

How many Snickers bars are missing from your inventory?
Answer: 10

How many Snickers bars do you have left?
Answer: 90

How much money did it cost you to purchase the 10 Snickers bars you just sold?
Answer: $6 (10 candy bars x 60 cents each = $6)

What was your profit on those Snickers bars?
Answer: $4 (you charged $10, but paid $6 = $4 profit)

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Thus, for every Snickers bar that disappears from your inventory, $1 will show up in your cash register. And for every $1 that shows up in your cash register, 40 cents of that is considered to be “profit” because Snickers bars cost you 60 cents each.

This is EXACTLY the same process that the credit-based accounting system uses. In this model, a Snickers bar would represent a credit. 10 credits (or Snickers bars) missing from the system (your store) = $10 in your cash register.

NOTE: a store owner will never SELL sweepstakes entries, or credits. When a customer purchases $1 worth of Internet time or other product, the customer receives 1 FREE sweepstakes credit.

Bonus Question: If you had 100 credits in your account (credit pool) and a customer came to your store and purchased $10 worth of product (Internet time) and was given “free credits”, how many credits do you have left?
Answer: 90 Credits

You can see that when 10 credits are missing from your credit pool, $10 shows up in your cash register. THERE WILL ALWAYS be a ONE to ONE RELATIONSHIP between DOLLARS and CREDITS! One credit missing from your pool of credits = $1 in your cash register.

Let’s move on to the next level of understanding. When a customer receives sweepstakes entries, we know that pretty soon that customer might “REDEEM” some of those entries to receive prizes or cash. Let’s walk through that now by going back to our example with Snickers.

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The customer purchased 10 Snickers bars for $10. But after getting out of the store he has an epiphany and realizes that nobody can possibly eat that many Snickers bars–so he wants to RETURN some of them. He walks back into your store and says “I changed my mind–I only want 5 of them, not 10″. (Let’s ignore laws about returning food products for now; just go with it). He hands you five of his Snickers bars and you return $5 back to him.

How many Snickers bars do you now have in inventory?
Answer: 95 (you had 90 but got 5 of them back)

How much money have you made now (gross)?
Answer: $5 (you had $10 because you sold 10 candy bars, then got 5 candy bars back and paid $5 back to the customer)

This is precisely what happens if a customer REDEEMS for cash. Two things occur at this point.

  1. The credits (Snickers bars) move BACK into your pool of credits (inventory). Note: these will be sold again to the next customer!
  2. You pay the customer $1 each for those credits (Snickers bars).

You can see that there is STILL a ONE to ONE RELATIONSHIP between DOLLARS and CREDITS. THERE WILL ALWAYS be a ONE to ONE RELATIONSHIP between DOLLARS and CREDITS! One credit missing from your pool of credits = $1 in your cash register.

Thus, your pool of credits becomes your inventory. If you start with 1,000 credits, you will always end up with $1,000 when your pool pool of credits is at zero (no credits left).

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Now let’s add the Distributor into the equation. Distributors usually OWN the Internet Kiosk and can, therefore, charge Business Owners more (because Business Owners don’t have to purchase the Kiosk). Usually a Distributor charges a Business Owner between 60-70 cents per credit. In this case, let’s call it 60 cents per credit.

Let’s continue with our previous example. When the Business Owner needs more Snickers bars (or Credits), he will contact the Distributor to buy them.

How much does the Business Owner pay the Distributor to purchase 100 Snickers bars (or credits)?
Answer: $60 (60 cents x 100 Snickers bars = $60)

How much does the Distributor pay to the Manufacture to buy the 100 Snickers bars (or credits)?
Answer: $30 (30 cents x 100 Snickers bars = $30)

How much money does the Distributor make when the Business Owner purchases 100 Snickers bars (or credits)?
$30 ($60 to the Distributor by the Business Owner less $30 paid by the Distributor to the Manufacture

Why doesn’t the Business Owner simply go directly to the Manufacture to purchase Snickers bars (or credits) and “cut out” the Distributor?
Answer: Because the Manufacture doesn’t sell Snickers bars (or credits) directly to Business Owners. Distributors can’t purchase 100 Snickers bars but are more likely to purchase 100,000 Snickers bars at a time.

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Let me explain why this method is so convenient for business owners and distributors. If you are a business owner and your supply of credits (or Snickers bars) is getting low, what do you think you should do? Obviously you must purchase more credits (or Snickers bars) from your distributor. How often will you do this? As often as it takes! Normally a business owner will purchase credits about once / month. Sometimes a store will go through more Snickers bars (or credits) than expected. If this happens, the store owner will call the distributor sooner than expected to purchase more Snickers bars (or credits). However; the business owner never has to receive invoices or “pay bills” for Snickers bars consumed.

NOTE: ALL of the profit made from selling a Snickers bar (or other products associated with sweepstakes credits) belongs to the business owner–every penny of it! This is because he has already paid for the Snickers bar. Of course, the Business Owner will likely want to use some of that money to purchase more “inventory” in order to have enough Snickers bars on his shelf (or credits in his credit pool) to supply future customers.

As a Distributor, you never need to invoice the stores that are using your sweepstakes platform (whether it be a sweepstakes Internet cafe or a business with an Internet kiosk / sweepstakes Totem). When the business owner runs low on “inventory” (Snickers bars on the shelf or credits in the credit pool), he contacts his distributor and purchases more. Although our web-based platform allows real-time reporting on performance (allowing access from smart phones, laptops, or anything with an Internet connection), the Distributor NEVER has to send an invoice to a business owner. If the store runs out of Snickers bars, it can’t sell any more Snickers bars. If it runs out of credits, nobody can participate in the sweepstakes.

To make this even more simple, we have a convenient “alert” system that allows Distributors to receive a notification (email or SMS) when available credits at one of their accounts, or stores, drops below a pre-defined threshold!

POP QUIZ: When the Business Owner has $2,000 in his Internet Kiosk, how much of that money is due to the Distributor?
Answer: None of it! The money belongs to business owner. However; the Business Owner will likely use some of that money to purchase more credits!

As you can see from the “Pop Quiz” answer, Distributors don’t need to worry about invoicing business owners or about collecting money due to them. Distributors usually give the cash box key for the Internet Kiosk to the business owner! Instead of being “bill collectors”, Distributors become “order takers”. Here at SweepsCoach we have filled both of these roles and believe me when I tell you that being an “order taker” is much more fun than being a “bill collector” and chasing people trying to collect payments!

SUMMARY:

The credit system for sweepstakes platform management eliminates the need for invoicing and for driving around collecting money from machines or Business Owners. Business Owners collect the money and pay Distributors in whichever way is most convenient (bank deposits, checks, etc). The Business Owner never owes the Distributor any money and the Distributor never owes the Manufacture any money. Whatever your role you play in the distribution process, you receive your money before you deliver your product. This means you will never be a “bill collector”. The system is accurate, it saves time, it reduces risk, and is SIMPLE, STRAIGHTFORWARD, and INTUITIVE.

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Below is a simple diagram that outlines the flow of credits in the credit system (compliments to Max, one of our fantastic Distributors, for creating this cool visual!)

STEP 1: Usually the Distributor gives some credits to the Business Owner to start. When a Distributor purchases an Internet Kiosk (sweepstakes Totem), it comes with 1,000 credits. We recommend that Distributors give some (or all) of those credits to the business owner. This is represented by the “1,000 Credits” at the top left-hand side of the diagram.

STEP 2: Customers purchase $1,000 worth of products, which consumes 1,000 credits. There will be some payouts (which means credits go BACK to the Business Owner’s pool of credits). However, once all 1,000 credits are consumed the Business Owner will have exactly $1,000.

STEP 3: The Business Owner keeps some of the money as profit. In this diagram, the business owner is keeping 40% of the money generated and paying 60% (or 60 cents per credit) to the Distributor.

STEP 4: The Business Owner purchases 1,000 more credits from the Distributor. In this case, the Distributor receives 60% of the revenue, or $600. Remember, some of this will be used to purchase more credits (it’s not all profit to the Distributor).

STEP 5: The Distributor purchases credits from SweepsCoach. Distributors pay 30% (or 30 cents per credit), so 1,000 credits cost the Distributor $300. Profit to the Distributor in this case is $300 for every 1,000 credits that move through the system. ($600 paid to Distributor by Business owner for 1,000 credits less $300 paid by Distributor to SweepsCoach for 1,000 credits = $300 profit to Distributor)

Credit-Based Accounting System