Businesses tend to take one of two forms – manufacturing or service-oriented. As the names suggest, manufacturing businesses manufacture something where service businesses offer a service. Certainly, there are some businesses that do a little of both, like selling a product but also providing repair and leasing services. However, there are important differences between these business types, differences that span from the product sold to the way the company keeps its books.
Manufacturing businesses sell a different product than service businesses do. A manufacturing business creates and sells a physical product where a service business sells a service. For instance, a soap company is a manufacturing business. In contrast, a service business could be an accounting or a legal firm. In both cases, an action is for hire. The accountant will do taxes or the lawyer will prepare a brief. There is no physical product to sell; instead, the customer requires the service provider's involvement.
The difference between a manufacturing business and a service business carries over into the company’s site. In a manufacturing business, the company needs a reasonable proximity to customers, be they retail customers, distribution centers or other companies. Service businesses have far more latitude. While the best place for a service business does depend on the scope of the service company’s operations, some people run successful service businesses out of homes or from warehouses because, for the most part, the client does not visit the business, such as in the case of a pest control company or a ghostwriting business.
Manufacturing businesses and service businesses also differ in the way the company handles its accounting. Obviously, there is no inventory to track in a service business but there are greater accounting differences. Service businesses have to levy a cost on the hours their service providers work. These figures are offset by the income the company receives; this is the cash method of accounting. Manufacturing businesses typically use an accrual method, meaning that the company counts an invoice as income. Further, any returns of allowances the company has to make offset this income; it is then further reduced by the cost of goods sold to find the company’s net profit.
When forecasting, a manufacturing business counts its inventory first. Next, it estimates the number of units that it can produce in a given period; this number depends on the capabilities of the equipment the manufacturing company owns as well as the predicted sales. Then, the company calculates the cost of the goods sold. In a service business, forecasting is completely different. There are no costs of goods sold other than the company’s overhead, there is no inventory and there is no way to economize equipment to develop efficiency gains. A service business bases its forecasts entirely on what the company’s service providers can manage.