Have you ever considered the various businesses that participate in putting on a Major League Baseball game? While the "businesses" that get the most attention are the baseball teams, there are many other businesses that handle the food concessions, the shops that sell jerseys and other team paraphernalia, the company that manages the stadium, and the list goes on and on. In order to properly forecast financial results, it is important to distinguish whether the company is essentially a "manufacturer" or a "service provider". In this article, I will discuss the differences between these two types of companies and explain how these differences affect their financial forecasts.
The simple, straightforward difference between manufacturers and service providers is that a manufacturer sells a tangible product while a service provider supplies "useful labor". It is important to see how this difference works in practice and its impact on forecasting costs and the necessary amount of financing. Manufacturers purchase raw materials and incur labor and overhead costs to prepare products for sale.
Continuing with the baseball game example, let's consider one of the teams. Although you might think that the company has an inventory of players from which to select the line-up, the team is actually providing a service. Players' "useful labor" earn money by entertaining the patrons who pay to watch them play (I mean, "work"). Like many service companies, the majority of the teams' expenses relate to salaries. As a result, future costs are comparatively easy to estimate.
A manufacturer has a more complicated forecast as the company has to estimate changing production-related costs. At a ballpark, an example of a manufacturer would be the food concessions. Just like any other restaurant, the company's employees (labor) make use of food ingredients (raw materials) to manufacture food items or meals. For example, when a customer orders a hot dog and a $9 beer, the employee takes a hot dog, bun, condiments, beer, and containers from the inventories on hand. The company has to estimate the most efficient number of employees during times of peak production (before the game and between innings). To put together a good forecast, the manufacturer has to consider changing raw materials costs, labor costs at different levels of production, and the optimal level of inventory to keep on hand. Money is required to produce or purchase inventory so manufacturers usually require more financing than service providers.
Some companies are both service providers and manufacturers. Let's say that a rock star is hired to sing the national anthem. After singing, she sets up a booth near the concessions, takes pictures with fans, and sells her CDs. In this case, the singer provides a service when she is paid to sing the national anthem. She is also acting like a manufacturer when she sells a tangible product, the music CD. To produce the CDs, the singer would have incurred costs to purchase blank CDs, paid for time in a recording studio, and paid producers to produce the singer's product. All of these costs incurred to produce the CD would be included in the costs of the CD inventory. In the real world, there are many companies that sell both services and products.
One type of company that is tricky to classify is a software company. Consider the programming that goes into those scoreboard races that have become so famous. For example, when there is a downtime at a Washington Nationals game, the scoreboard displays a footrace between Presidents Washington, Jefferson, Lincoln, and Teddy Roosevelt. There is a lot of computer animation by programmers required to put together this entertainment.
Is the programming a "tangible product" or a "useful service"? Programmers spend hours putting together a product, but often they don't have a physical product that sits in warehouses. Is a software programmer a service provider or a manufacturer? It really depends on whether the company continues to incur significant costs when the software is being distributed. Can the costs incurred be matched with the particular items sold? Would the distribution of the software result in significant additional costs to the company? If almost all of the costs were originally incurred, it is easier to consider the sale of the software as a service. If the software is sold on CD's and the costs can be allocated to the CD's (like in the case of the anthem singer), then the programmer could be considered a manufacturer.
In summary, manufacturers face many more variables when forecasting financial results. Businesses can be very complicated when they sell both products and services. Luckily, Enloop was designed to simplify the forecasting process. Enloop considers a user's input to determine whether the company should be classified as a service company or a manufacturer. Enloop simplifies the input as users are able to classify whether particular items entered are products or services. If users select products, Enloop automatically calculates cost of goods sold and inventory based upon the inputs. The system considers the necessary extra financing resulting from the extra expenses and inventory. So sit back and enjoy the game; Enloop will take care of the details.