Financial Statement Analysis

and finance Allah shmoop What is the difference between income

statements for manufacturing companies service companies and retail companies Three

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

for Service and Curly were for retail They do completely

different things for a living Manufacturers make stuff Retailers sell

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

They just sell time and expertise So first manufacturers all

right As we said they make stuff you know ties

underwear cookies artisanal cheeses anything you can think of really

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

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

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

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

involved in a Tesla factory billion spent on robots to

make cars more money for equipment inside the factory to

pick up and haul cars around all the steel and

plastic and rubber and stuff Also they have to buy

most of the individual parts from someone else like the

cup holders come from a company in Russia The engine

seals come from a prison labor gang in North Korea

wherever the parts come from Tesla has to pony up

the cash for all those individual parts they buyem Manufacturing

companies then often have huge amounts of depreciation that there

running through their income statements in any given year when

the company has to build or upgrade a new factory

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

all this cash flow in that year will be ugly

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

cost of that factory heavily is it goes down in

value But then say in four five years later when

that factory your plan is actually working running efficiently breaking

down on Lee every month instead of every hour like

it did in the beginning Well that company might then

show Gap adjusted accounting earnings or net income of ah

say three hundred million dollars But it will have produced

something four hundred fifty million dollars in cash Will The

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

expensive factory they built in the first place Well manufacturing

companies also tend to have large numbers of employees big

pension fund obligations that are often awkward to manage They

have unions They have regulatory issues to think about Like

the manufacturer Drilling for oil is one of the most

heavy caf axe or capital expenditure intensive industries on the

planet So you can imagine all the moving parts from

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

for insurance When yeah this happens So issued Guess the

income statement Balance sheet cash flow Statements for a complex

manufacturing company are gnarly Yes that is the technical term

So then what about a service company right Like PricewaterhouseCoopers

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

service company in our little accounting world Here they sell

time That is the time of their employees their partners

and well their in house auditors Companies hire them because

well they have to hire them PWC is like the

rabbi priest and shaman who blessed the reported earnings of

a given company and they testified that the numbers are

in fact accurate If PWC is ever wrong well PwC

people go to jail or war us so PwC sells

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

lawn fertilizer or iPhones or coffee mugs with swear words

on them Well they bill out there junior partners at

three hundred dollars an hour while paying them one hundred

dollars an hour and the company then the service company

makes a gross profit of two hundred bucks an hour

on that jr our time But in a service company

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

large orders of steel needed no risk of an environmentally

destroying oil spill or explosion The risks here are legal

and regulatory compliance ones for which PWC pays hefty insurance

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

depreciate And very a few years where cash flow is

negative if ever like they just get less profitable in

bad times Well the company has pretty steady predictable earnings

And unlike say an oil drilling company it has an

easy time laying off a third of its non union

workforce Should economic times get really bad Or should business

you know take a big turn for the worst service

companies can adjust quickly to changes the downside well tons

of competition A dozen senior accountants could get mad at

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

they wanted Well this disgruntled group could then just quit

on Mass and start their own firm doing the same

accounting thing they were doing for PWC And voila A

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

big manufacturers Try quickly raising twenty billion dollars for drilling

platforms in the ocean Riggs pipes shipping contracts and on

on on on yeah no big oil competitors coming along

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

big balance sheets Unlike big oil or big manufacturing companies

service companies typically much flatter organizationally than manufacturing companies as

well The intellectual distance from the most senior partner CEO

is often not that distant from the most junior partner

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

is brain and out of the line People who grease

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

gaps there totally different hierarchy or management style needed so

all kinds of challenges then get introduced to manage people

who are well not a smart is Ilan Okay so

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

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

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

needless markup And all of them quiver at the feet

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

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

well how did they make money thinking about the sale

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

tie They just bought it Yeah of course from Thailand

they paid thirty dollars for it So when they sell

it for eighty dollars they showed gross profit of fifty

bucks And that fifty bucks of unit gross margin then

has to pay all kinds of operating cost a part

of the salary of the person who sourced that tie

or founded in Thailand It had to pay the line

floor robot who sold the tie to Grandmama It had

to pay rent on the building in which the tie

was sold and had to deal with the crazy high

level of shoplifting product loss returns breakage and so on

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

buyer went to return it to the little shop in

Thailand where they bought it and that shop had turned

into a Starbucks and was nowhere to be found So

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

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

will have to have bought that go out of style

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

l pink shirts Yeah not going to sell least not

for their retail price of one hundred twenty nine ninety

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

to discount them heavily like Look at these things and

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

for less than fifty bucks each One hundred twenty nine

ninety five retail price was supposed to be nicely profitable

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

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

of fifty bucks was their gross cost of goods Sold

that fifty dollars to the cellar for that shirt in

Thailand To them at fifty was revenues against what probably

cost them twenty or thirty bucks or last to manufacture

So yeah the shirt maker was a manufacturer selling to

a retailer and maybe there was a sales representative firm

brand of service company right hired to sell those products

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

others So in this one hundred twenty nine dollars ninety

five cent transaction all three types of business chip in

here The tie manufacturer the sales rep service firm that

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

sells it to Grandma for eighty bucks all Stooges working

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