Study: What general business types do owners use to generate profits?
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Slide 1 (:08s)
Links to an external site.
Welcome to Introduction to Accounting for a User’s Perspective. What general types of business exist?
Slide 2 (:27s)
Links to an external site. You should have just learned about the advantages and disadvantages that owners will experience depending on the ownership structure they choose when they legally create their businesses such as sole proprietorships
Links to an external site., partnerships, corporations, and LLPs
Links to an external site.and LLCs
Links to an external site.. A business’ ownership structure refers to how it has been organized and set up from a governmental and legal perspective.
Slide 3 (:39s)
Links to an external site. A business type refers to what the business does to provide goods and services to customers and who its customers are.
The five most common business types that we will discuss are:
1) Manufacturer (who often sells to the wholesaler)
2) Wholesaler (who often sells to the retailer)
3) Retailer (who sells to the end consumer)
4) Service Provider (who provides services directly to the end consumer)
5) Hybrid (who often combine two or more business types into one)
Slide 4 (:15s)
Links to an external site. What is a manufacturer?
A manufacturer is a business that takes raw materials, labor and manufacturing overhead costs
Links to an external site. and produces a finished product.
Slides 5 & 6 (1m:12s)
Links to an external site. Many great examples of manufacturers are provided on the show titled “How it’s made” on the Science Channel
Links to an external site. or on YouTube, just search on the term “How it’s made”. If you want to watch a short video on how hot dogs are manufactured, click on this hot dog image.hot dog image
Links to an external site."Hot dogs are an all-American fare, but most likely it was German sausage-makers who first came up with the idea."
We won't watch the rest of that video now, but please go and watch a couple. They are kind of fun to watch.
A company that makes hot dogs is a type of manufacturer because it takes raw materials, the labor from assembly line workers and general manufacturing overhead machinery and utilities and manufactures a hot dog.
Although many manufacturers have begun to sell their finished products directly to consumers over the Internet, many still sell their goods to wholesalers Links to an external site.(also know as distributors) who then sell to retailers Links to an external site., who then sell to the end consumers.
Slide 7 (:22s)
Links to an external site. For example, one of our former BYU-Hawaii students has become a profitable surfboard manufacturer (Raynor Surf
Links to an external site.) who sells to retailers but also sells directly to consumers, so he effectively has become a type of hybrid business with both manufacturing and retail operations.
Slide 8 (:30s)
Links to an external site. Profitable manufacturers must be able to sell what they produce at a price that is greater than their cost of production, thus generating a "gross margin
Links to an external site.". If their gross margin is large enough to cover the key operating costs of a manufacturer such as rent, supplies, utilities, administrative salaries and wages, and advertising, etc. they will usually generate positive operating income
Links to an external site. before interest and taxes.
Slide 9 (:57s)
Links to an external site. What is a wholesaler/distributor/middleman?
A wholesaler (also known as a wholesale merchandiser, distributor, or middleman) purchases finished products from a manufacturer and then resells them to a retailer who sells to the end consumer. For example, when fishing vessels arrive in a harbor with a boatload of seafood, they often sell their whole load to a “wholesaler”. Pure wholesalers, are often referred to as middle-men because they operate in the middle between the manufacturer and the retailer. If a wholesaler sells directly to the end consumers, the wholesaler would be classified as a wholesale retailer because it purchases at wholesale, but sells not only to other businesses but makes retail sales to end consumers as well.
Slide 10 (:11s)
Links to an external site. CostCo
Links to an external site. is an example of a wholesale retailer because it sells directly to retail businesses AND it sells directly to the end consumers.
Slide 11 (1m:05s)
Links to an external site. This middle-man arrangement allows manufacturers to focus on production (i.e. catching more seafood) and the wholesalers to focus on selling the product to other businesses. Be careful though, do not imagine that in today's world a manufacturer can ignore his customers and only focus on producing a great product. The best manufacturers retain close contact with their customer base and seek to meet their needs.
Manufacturers often sell their whole production to wholesalers at significant discounts to wholesale and retail prices. The wholesalers who purchase the production then markup the cost to arrive at the price they will sell the goods to others, such as retailers or consumers. Naturally, in order for a wholesaler to be able to generate a positive gross margin, he must be able to purchase the goods from the manufacturer at a discount and then resell them to others at a higher price.
Slide 12 (:21s)
Links to an external site. A wholesaler’s gross margin needs to be large enough to cover the key operating costs of running a distribution business such as salaries, wages and commissions, transportation costs, communication costs, and general administrative costs which will hopefully be low enough to result in a positive operating income.
Slide 13 & 14 (:27s)
Links to an external site. What is a retailer?
A retailer sells products or services directly to the end consumer.
For example, a shopping mall is full of retailers selling clothes, toys, electronics and other finished goods to end consumers like you and me. That is why these stores are often referred to as “retail” outlets. One of the better known clothes retailers in the United States is the Gap
Links to an external site..
Slide 15 (:41s)
Links to an external site. In general, retailers purchase their goods at “wholesale” prices, mark them up to “retail” prices and sell them to consumers. For example, if a retailer purchases $100 of inventory which it then sells to a consumer for $150, the retailer will have earned a $50 gross margin. This $50 represents a 50% retail markup on its cost of goods sold of $100. $50 gross margin/ $100 cost of goods sold = 50% markup on cost.
Slide 16 (:21s)
Links to an external site. A retailers’ gross margin needs to be sufficiently large to cover the operating costs of running a retail location. The key operating costs for retailers include salaries, wages, commissions, rent expense, utilities expense, advertising and other administrative costs.
Slide 17-19 (:41s)
Links to an external site. What is a service provider?
A service provider charges customers a fee in exchange for providing assistance of some kind. For example, a piano instructor who charges a fee to teach a student how to play the piano is in the service industry.
Many professions operate in the service industry such as professional services firms (Deloitte Links to an external site.), for-profit universities (University of Phoenix Links to an external site.) and health maintenance organizations (Aetna/US Healthcare Links to an external site.). Other service providers are janitors, dry-cleaners, moving, or shipping (MAERSK Links to an external site.) companies.
Service providers effectively sell their time and their expertise to customers.
Slide 20 (:46s)
Links to an external site. One story of a service provider goes as follows: A huge hydroelectric dam malfunctioned thus shutting down the generation of electricity for many nearby customers. The dam operators called in an expert to fix the problem. When the expert arrived, he asked a few questions, walked over to one of the generators, pulled out a hammer and struck the generator. The generator immediately restarted, and the city lights nearby turned back on. The dam operator asked the expert how much the repair cost. The expert replied $2,015. The operator was astounded and asked for an itemized bill which was received and was itemized as follows: $15 for one hammer, $2,000 for knowing where to use it. The bill was paid. A repairman is a type of service provider.
Slide 21 (:26s)
Links to an external site. One of the challenges service providers encounter when striving to increase profitability is that their revenues
Links to an external site.are limited by the amount of time their employees have, the number of employees they have and the expertise that they and their employees possess.
Service providers often need to invest a significant amount of their revenues in training their employees to help them work faster and smarter.
Slide 22 (:21s)
Links to an external site. Service providers need to charge a fee to their customers for their workers’ time that is sufficient to pay their workers’ salaries plus some (i.e. gross margin) to help pay for the operating costs of running the business, such as rent, advertising, supplies and equipment expenses. If they don’t, they will likely start generating net losses.
Slide 23-26 (:36s)
Links to an external site. What is a hybrid business?
A hybrid business is any business that includes two or more of the business types described previously.
For example, McDonalds Links to an external site. could be classified as a hybrid business because it manufacturers the food it sells, and it is a service business because it cooks and provides the food to the customers when they want it.
Wacom Links to an external site., the manufacturer of high quality digital tablet displays, is also a hybrid, because it manufactures its tablets and sells to other businesses, but due to the benefits of the Internet, also sells directly to consumers.
Slide 27 (:17s)
Links to an external site. Hopefully, you now have a good understanding of the 5 business types we will discuss in this course: manufacturer, wholesaler, retailer, service provider and hybrid. Good luck on the upcoming quiz.