[mattegan]

Can someone help me understand something regarding gift cards as a way to support businesses during this shutdown?

Gift cards are basically outstanding liabilities, right? If they're not accounted for correctly, when large amounts of people are able to redeem them again, they're left with no money to pay those expenses in the future. Obviously, things aren't as bad if ratio of gift cards to cash spending is somewhat reasonable when the business reopens.

Seems unless you can commit people to not redeeming the cards, you're essentially time-delaying the reduction in revenue.

Also, it's my understanding that gift cards are pretty difficult to account for normally (requiring looking at historical redemption data to prevent liabilities from growing indefinitely on the balance sheet). Some of these places are going to be accepting gift cards for the first time in their history. Is there any room here for a guide to help these places navigate the accounting of them?

[alexhutcheson]

A couple points:

- Interest-free loans are valuable. Small businesses that want to borrow would normally have to pay relatively high interest rates to do so.

- A $20 gift card only results in a $20 reduction in revenue if that customer was definitely going to buy something from you even if they didn't have a gift card. This isn't true 100% of the time: X% of gift cards will be given to people who wouldn't otherwise have been customers, X% will be bought by people who aren't regulars, but would like to support a local business, X% will be bought by people who have always thought about going to that business, but wouldn't have checked it out without this push, etc. For gift card holders who wouldn't have been customers without a gift card, your loss is just the marginal cost of serving that customer. Maybe for they buy $20 worth of stuff from you, but your marginal cost to serve them is only $8. That's still $12 you otherwise wouldn't have had.

- In the right circumstances, gift cards can be a cheap way to acquire customers. Some number of customers are going to discover businesses through this and other similar efforts. If this brings in customers at a lower customer acquisition cost than typical channels, then that's a benefit, particularly if the customer sticks around even after they've used up the gift card balance.

- A substantial portion of gift card balances never get used. People forget, they move, they use part of the card and end up with an inconveniently small balance, etc. That ends up being free money (admittedly free money that's difficult to account for).

[bigwheeler]

Regarding the future reduction in revenue- I consider this to be just another way to “flatten the curve”. Spread out some of the money to help during this time of emergency, and when things are getting back to normal, they’ll figure it out.

Regarding the accounting of these gift cards, it appears that this functionality (the ability to sell them) has to be activated in the Square POS system, and upon use, becomes just as easy to redeem as cash. Square does all of the accounting for you.

[in0v8r]

In theory, redemption would be distributed over time vs. the abruptness of our current situation. And, as you mentioned, there will be other forms of payment. I would expect most people would by the gift card for less than what they expect to spend.

[brunoTbear]

Here's an article from The Atlantic about this question: https://www.theatlantic.com/technology/archive/2019/08/where...

US Law requires a minimum 5 year expiry on gift cards https://www.ftc.gov/sites/default/files/documents/statutes/c...

Starbucks is particularly fortunate to be based on Washington https://www.fool.com/investing/2017/07/15/these-3-companies-...

[kevindong]

For what's it's worth, gift cards issued through Square cannot expire. Albeit the merchant can unofficially decline.

> Do gift cards expire?

> Nope, gift cards from Square don’t expire.

https://squareup.com/help/us/en/article/5433-gift-cards-faqs

[astraelraen]

Most US taxpayers that this will "help" are small businesses that utilize the cash basis of accounting. There is no deferral for cash basis taxpayers and the accounting is simply you get cash, you have income.

Does that mean small business shouldn't track their gift cards? No, they should have some way to track them because they are outstanding liabilities.

Financial reporting and accrual basis taxpayers have a different answer. The difficulty in accounting for gift cards applies to this group of business owners, which is probably a lot smaller than most people realize.

[orblivion]

Imagine rent is coming due at the end of March, and you're $1000 short. But you expect to have $5000 more than needed to get by, by the end of April. You'd be happy to take $1000 in March in the form of gift cards and have them redeemed in April.

To be safe, though, I plan to wait a few months, and maybe space it out across a couple months.

[NortySpock]

Correct. Of course you could have the gift card expire after a year, letting you remove those liabilities from your balance sheet eventually.

Otherwise you could antipate that say 1% of your customers will use a gift card on any particular day, and hopefully you have that spaced out far enough that you can survive paying your liabilities over time.

[frosted-flakes]

But most countries/states have laws that prevent gift cards from expiring.

[yellowbeard]

The redemption rate on giftcards is not 100%[1]. Businesses don't need to expect to deliver the total value of the giftcards.

[1] https://en.wikipedia.org/wiki/Gift_card#Redemption_rate

[amylene]

There exists a significant set of businesses who are overall profitable, but cannot manage cash flow. This mechanism robots the cash flow from incredibly bad times, into the future.