TYPES OF BUSINESS ACCORDING TO ACTIVITIES

Introduction

A business is an organization that converts inputs or resources such as material, labor and overhead into outputs
which are usually goods or services. There are three(3) major types of business, according to activities, as
follows:

1. Service Businesses
2. Merchandising business;
3. Manufacturing business.

Service business
Service businesses generally utilize their employees to provide intangible products or services to customers.
They perform services for a fee. These services include professional skills, advice, expertise, and other related
products. The primary source of revenue of service businesses is the performance of services, often referred to
as Service Revenues.

One concept in business is the operating cycle. Operating cycle is the time it takes for a company to create
products, sell these products and collect cash payments from customers. For service companies, the major
phases of their operating cycle include paying out money for employees and other operating expenses,
performing the services, and collecting cash payments from customers.

Advantages of Service businesses:

 Absence of inventory or tangible goods held by the business
 No production facilities required

Disadvantages of Service businesses:

 Constant evaluation and training of human capital/employees
 Good employment benefits to attract, retain and motivate highly skilled employees

Examples of service businesses are:

 Business services, such as accounting, advisory, taxation, advertising, engineering, legal, research
agencies, computer programming, etc.
 Personal services, such as laundry, beauty salon, photography
 Automotive repairs, car rental, car wash, parking spaces
 Fitness facilities, amusement parks, bowling centers, golf courses, theatres
 Hospitals and clinics, schools, museums, banks
 Hotel and lodging, and more.

Merchandising businesses
Unlike service businesses, merchandising businesses sell tangible products. This type of business buys finished or
almost finished goods from their suppliers and resells the same to customers. Merchandising businesses
primarily earn revenues from the sale of the goods or merchandise, also known as Sales Revenue or Sales.

There are two(2) types of merchandising businesses – retailers and wholesalers. A retailer sells goods directly to
the customers, while a wholesaler sells goods to retailers.

The operating cycle of a merchandising business is typically longer than that of a service business. It starts with
the purchase of goods to be held for resale, also known as Inventory. It eventually sells the inventory to
customers, and the cycle ends with the receipt of cash payments. The purchase of inventory and its subsequent
sale lengthen the cycle.

Advantages of merchandising businesses:

  Can easily promote sales since there is an existence of a tangible product
 Generally consume less conversion time, effort and cost.

Disadvantages of merchandising businesses:

 Necessity to hold inventory

A merchandising business buys a product and sells it without changing its form. Examples include all distribution
and retail stores such as: department store, grocery, hardware, clothes and accessories shop, consumer
electronics, home furniture, appliance stores, drug stores, etc.

Manufacturing businesses
Manufacturing businesses, or simply manufacturers, are relatively complicated organizations than service and
merchandising businesses. As the name suggests, manufacturers create their own products. They use raw
materials, components, or parts which are processed using machines, computers, and labor to produce finished
goods.

Similar to merchandising businesses, they earn revenues primarily from the sale of their manufactured products.
The products of manufacturing businesses can be sold directly to consumers, retailers, and other manufacturers.

Since a manufacturing business produces its own products, its operating cycle generally has the longest period
compared to service and merchandising. It has an additional phase which is the production of goods. These
goods are also held as inventory and later sold to its customers.

Advantages of manufacturing businesses:

 Quality control
 Can easily promote sales since there is an existence of a tangible product.

Disadvantages of manufacturing businesses:

 Need for huge initial capital outlay
 Need to hold inventory
 Need to finance quality control procedures
 Need to monitor overhead costs such as utilities, etc.

A manufacturing business combines raw materials, labor, and overhead costs in its production process. The
goods produced are then be sold to customers. Examples include:
 Food processing, such as producing canned meat, frozen goods, dairy products, bottled drinks,
also bakeries and oil mills
 Fabric mills and textile production from cotton, wool, polyester; and also clothing factories that
use textile as raw material
 Wood and metal works, such as in building cabinets, tables, chairs
 Oil refineries, chemical labs, plastic and rubber production
 Ship builders, aircraft manufacturers, car makers
 and many other producers and factories