Many small business owners don't give a lot of thought to their business type when making early decisions. But understand the inherent differences between, for instance, manufacturing businesses and service businesses can help you understand your specific needs better.
Here's a short guide to the differences and similarities of both service and manufacturing businesses.
Both service and manufacturing companies must deal with their own unique properties. This creates differences in the way they handle their accounting in ways involving assets and expenses. Here are a few key differences.
- Inventory or Lack Thereof. One of the biggest differences between the two types of business is in inventory. A manufacturing business buys raw materials, stores inventory, and has to account for that inventory in their books. A service business, on the other hand, generally provides intangible goods for sale in the forms of consulting, a practice, personal service, or other things. Pricing inventory for a profit is occasionally easier than services because you have to account for all costs involved. Services, though, may be hard to value correctly if you don't fully understand your overhead costs.
- Complexity Levels. Because of the lack of inventory, service businesses generally find their books a lot less complex to maintain. They may even be able to keep their business on a cash (versus accrual) basis for tax purposes because of this lack of inventory. This could make things significantly easier when figuring profit and loss, balance sheets, and direct cost of services provide. It generally makes filing income tax forms easier—and therefore less costly.
- Cyclical Nature. Both types of businesses have their own types of cyclical behavior, but they can be affected by different forces. A personal service, such as mechanical trades or accounting work, may endure through recessions or slow times when consumers aren't buying new materials. Manufacturing, on the other hand, can often look forward to a healthy holiday season or a positive first quarter when businesses see higher purchase rates. Accounting for both types of cycles is key to making a business plan.
Even with businesses that appear different, there are similarities. Both service and manufacturing, for instance, have assets, accounts receivable, and accounts payable which contribute to the value of the company. By properly valuing elements like accounts receivable, you can ensure that your business—in any form—is profitable.
You must also create accurate reporting. This is fundamental to knowing the health of your company, getting and giving out credit, and boosting profitability. The aspects making up reports—like inventory versus hourly billable hours—may be different, but the end result must be similar.
How can you work within the limits of your business type and find the best ways of managing its unique nature? The best way is to work with a professional accounting service with experience in your industry or business type. With their assistance, your business can grow and thrive, no matter what its particular challenges or assets.