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and finance Allah shmoop What is the difference between income

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statements for manufacturing companies service companies and retail companies Three

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Totally different stooges Let's call a mo for manufacturing Larry

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for Service and Curly were for retail They do completely

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different things for a living Manufacturers make stuff Retailers sell

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stuff and service companies well don't do anything with stuff

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They just sell time and expertise So first manufacturers all

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right As we said they make stuff you know ties

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underwear cookies artisanal cheeses anything you can think of really

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cars for instance Let's take cars well Some of the

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world's most famous manufacturing companies are carmakers Ford and GM

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and Toyota and BMW in Tesla's most manufacturing companies have

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huge embedded cost to produce their products Think about what's

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involved in a Tesla factory billion spent on robots to

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make cars more money for equipment inside the factory to

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pick up and haul cars around all the steel and

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plastic and rubber and stuff Also they have to buy

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most of the individual parts from someone else like the

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cup holders come from a company in Russia The engine

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seals come from a prison labor gang in North Korea

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wherever the parts come from Tesla has to pony up

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the cash for all those individual parts they buyem Manufacturing

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companies then often have huge amounts of depreciation that there

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running through their income statements in any given year when

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the company has to build or upgrade a new factory

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Well they'LL cough out massive amounts of cash to do

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all this cash flow in that year will be ugly

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in a half That's like this guy they'LL depreciate The

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cost of that factory heavily is it goes down in

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value But then say in four five years later when

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that factory your plan is actually working running efficiently breaking

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down on Lee every month instead of every hour like

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it did in the beginning Well that company might then

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show Gap adjusted accounting earnings or net income of ah

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say three hundred million dollars But it will have produced

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something four hundred fifty million dollars in cash Will The

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extra cash they'LL have produced reflects the depreciation of that

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expensive factory they built in the first place Well manufacturing

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companies also tend to have large numbers of employees big

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pension fund obligations that are often awkward to manage They

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have unions They have regulatory issues to think about Like

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the manufacturer Drilling for oil is one of the most

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heavy caf axe or capital expenditure intensive industries on the

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planet So you can imagine all the moving parts from

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an accountant's perspective on top of risk and massive cost

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for insurance When yeah this happens So issued Guess the

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income statement Balance sheet cash flow Statements for a complex

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manufacturing company are gnarly Yes that is the technical term

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So then what about a service company right Like PricewaterhouseCoopers

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Something rather accounting firm Well they're kind of the ultimate

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service company in our little accounting world Here they sell

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time That is the time of their employees their partners

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and well their in house auditors Companies hire them because

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well they have to hire them PWC is like the

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rabbi priest and shaman who blessed the reported earnings of

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a given company and they testified that the numbers are

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in fact accurate If PWC is ever wrong well PwC

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people go to jail or war us so PwC sells

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its service of auditing It doesn't manufacture poker tables are

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lawn fertilizer or iPhones or coffee mugs with swear words

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on them Well they bill out there junior partners at

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three hundred dollars an hour while paying them one hundred

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dollars an hour and the company then the service company

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makes a gross profit of two hundred bucks an hour

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on that jr our time But in a service company

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there's really no heavy capital expenditure no robots Yet no

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large orders of steel needed no risk of an environmentally

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destroying oil spill or explosion The risks here are legal

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and regulatory compliance ones for which PWC pays hefty insurance

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So there's usually very little cap packs for PWC to

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depreciate And very a few years where cash flow is

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negative if ever like they just get less profitable in

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bad times Well the company has pretty steady predictable earnings

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And unlike say an oil drilling company it has an

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easy time laying off a third of its non union

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workforce Should economic times get really bad Or should business

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you know take a big turn for the worst service

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companies can adjust quickly to changes the downside well tons

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of competition A dozen senior accountants could get mad at

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PWC because they didn't get the kind of state boys

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they wanted Well this disgruntled group could then just quit

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on Mass and start their own firm doing the same

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accounting thing they were doing for PWC And voila A

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competitor is born Well that's not really a danger for

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big manufacturers Try quickly raising twenty billion dollars for drilling

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platforms in the ocean Riggs pipes shipping contracts and on

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on on on yeah no big oil competitors coming along

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anytime soon Service companies typically also don't have or need

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big balance sheets Unlike big oil or big manufacturing companies

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service companies typically much flatter organizationally than manufacturing companies as

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well The intellectual distance from the most senior partner CEO

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is often not that distant from the most junior partner

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We'LL compare that to the intellectual distance from Elon Musk

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is brain and out of the line People who grease

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those irks under the axles of the Tesla's way Big

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gaps there totally different hierarchy or management style needed so

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all kinds of challenges then get introduced to manage people

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who are well not a smart is Ilan Okay so

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that's a service company versus a manufacturing company Well then

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where does the retailer come in Well let's think of

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Macy's as the typical retailer or Nordstrom's or BestBuy or

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needless markup And all of them quiver at the feet

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of the world's greatest retailer Amazon So when Macy sells

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Ah Grandpa Ty for eighty dollars in their men's department

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well how did they make money thinking about the sale

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from an accounting perspective Well makes use didn't make that

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tie They just bought it Yeah of course from Thailand

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they paid thirty dollars for it So when they sell

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it for eighty dollars they showed gross profit of fifty

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bucks And that fifty bucks of unit gross margin then

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has to pay all kinds of operating cost a part

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of the salary of the person who sourced that tie

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or founded in Thailand It had to pay the line

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floor robot who sold the tie to Grandmama It had

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to pay rent on the building in which the tie

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was sold and had to deal with the crazy high

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level of shoplifting product loss returns breakage and so on

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What's breakage in a Thai Well the silk ripped The

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buyer went to return it to the little shop in

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Thailand where they bought it and that shop had turned

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into a Starbucks and was nowhere to be found So

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Macy's then eats the cost of that tie That thirty

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bucks And then there are all kinds of things Macy's

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will have to have bought that go out of style

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They just don't sell like those x x x x

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l pink shirts Yeah not going to sell least not

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for their retail price of one hundred twenty nine ninety

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five each Macy's paid fifty bucks forum Now they have

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to discount them heavily like Look at these things and

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they'LL likely lose money when they eventually sell and probably

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for less than fifty bucks each One hundred twenty nine

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ninety five retail price was supposed to be nicely profitable

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had the shirt sold but fifty bucks Macy's paid was

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the wholesale price So on Macy's books that wholesale price

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of fifty bucks was their gross cost of goods Sold

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that fifty dollars to the cellar for that shirt in

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Thailand To them at fifty was revenues against what probably

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cost them twenty or thirty bucks or last to manufacture

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So yeah the shirt maker was a manufacturer selling to

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a retailer and maybe there was a sales representative firm

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brand of service company right hired to sell those products

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into Macy's and Nordstrom's and Needless Markup and well the

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others So in this one hundred twenty nine dollars ninety

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five cent transaction all three types of business chip in

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here The tie manufacturer the sales rep service firm that

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places the tie with Macy's and the retailer who eventually

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sells it to Grandma for eighty bucks all Stooges working

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together at least you know until someone gets seriously injured 00:08:08.68 --> [endTime] Oh

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