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Sunday, March 29, 2020

Wanna Help? Don’t Buy Gift Cards—Buy the Stuff

At retailers and restaurants across the Seattle area, business is evaporating. Customers are just not going out to places where they might encounter other people.

One response from those who want to help these businesses is to purchase gift cards. This is not a very good idea.

A gift card is simply pre-payment for a product or serve that will be delivered in the future. When a business sells a gift card, they are taking on a liability for a future cost. They must carry that liability on their balance sheet, and since gift cards purchased for cash cannot expire, they will carry that liability until the card is redeemed.

When a gift card is purchased during this very slow time, two things might happen.

First, the business might do the correct thing and bank that money to cover the cost of providing the promised good or service in the future. That cash becomes an asset on their balance sheet that offsets the liability of the gift card. This is the smart thing to do, but it does nothing to help the business today.

Second, the business might do the wrong thing, and spend the gift card money to stay afloat today. But that means that sometime in the future, there will be a customer expecting a good or service, but no money in the till that day to cover that cost. Until that customer show up, the business will have an ugly little liability lurking all alone on its balance sheet.

The first scenario is harmless, but does not help either. The second is really bad, and, unfortunately, very tempting.

So, if you want to help a small business that is hurting because of the loss of business during the quarentinothon, buy something today. Carryout from a restaurant. Extra tips. Maybe outdoor dining in the wind. Buy products from a store and burn some inventory.

Just don’t think you are doing anyone any favors by purchasing gift cards.

Instead, buy stuff. Now.

Michael Luis
Michael Luis
Michael Luis is a public policy consultant who has been wrestling with housing, growth and economic development issues around Washington State for over 30 years. He is author of several books on local history and served as mayor of Medina.

1 COMMENT

  1. I disagree. Accrual accounting and cash-flow management are two separate things. There are a lot of seasonal businesses that accumulate cash in their peak season to weather the low season. This is really no different. You’re making assumptions about the business’s fixed and variable costs for delivering a product or service at a later time that are far from universal. Without knowing unit costs and markup, you have no idea how much of the revenues from the gift card ideally need to be put aside.

    Also, there’s a reason that so many businesses push gift cards: they are essentially zero-interest loans. When you buy a gift certificate, the business can deposit your cash in the bank and earn interest on in. If they sell enough gift cards, the interest alone can help defray costs right now. And equally important: many gift cards go unredeemed.

    Is actually buying things now better than buying gift cards? Sure. But for people without the need for the things now, buying gifts cards is better than nothing. The expense of redeeming the gift cards in the future certainly might be a problem, but the likelihood of going out of business now without cash in the door is a reality.

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