The pros and cons of internal profit centres
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There are dozens of methods an analyst can use to understand the internal workings of a business with the goal of improving efficiency and, ultimately, profit. One of these methods is examining an organisation in terms of cost and profit centres. Almost every business has cost centres and profit centres.
Ideally, every aspect of your organisation would be independently profitable. In reality, it simply isn’t feasible. Often, business leaders create cost and profit centres as a means of isolating expenses in order to focus on profit-generating operations. This delineation can have a positive impact on the business’s performance.
What are profit centres?
A profit centre is a particular department within an organisation that is focused on generating revenue. Basically, it brings in more money than it costs to operate.
Conversely, a cost centre is a business unit that does not make more money than it costs to operate. Costs are expected, controlled and accounted for.
Profit centres are focused on increasing the amount of revenue they generate. Like cost centres, they might have a specifically allocated budget that they must maintain, but in many cases, their expenses are allowed to increase in scale with profits.
How to create profit centres
For most businesses, the existence of cost centres is a given. However, with innovative thought and new methods, cost centres can be transformed into profit centres. A common example of this reversal is information technology.
IT is usually an expense. However, with a strong focus on efficiency and accurate calculation of ROI, many IT departments can impart a higher dollar value in benefits to an organisation than they cost to operate.
