Profit Centres

A popular approach to managing financial performance in a multi-site or multi-location business is to use profit centres.

A profit centre is a separately-identifiable part of a business for which it is possible to identify revenues and costs (i.e. calculate profit).

Examples of profit centres would include:

• Individual shops in a retail chain
• Local branches in a regional or nationwide distribution business
• A geographical region – e.g. a country (for multinationals) or region within a country
• A team or individual (e.g. a sales team, a team of installers)

Anything can be turned into a profit centre provided that a reasonably accurate and fair allocation of revenues and costs can be assigned to the profit centre. This, of course, is often easier said than done!

The main advantages and disadvantages of using profit centres can be summarised as follows:

Advantages of using profit centres

Provides useful insights into where profit is earned within a complex business

Supports budgetary control at a detailed level, including setting profit objectives

Can improve motivation of those responsible for the profit centre

Comparisons can be made between similar profit centres (e.g. shops in a chain)

Improves decision-making at a local level (likely to be closer to customer needs)

Finance can be allocated more efficiently – where it makes the best return

Disadvantages of using profit centres

Can be time-consuming to both set-up and monitor

Difficulties in allocating costs (particularly) and revenues (occasionally)

May lead to conflict and competition rather than cooperation within the business

Potentially de-motivating if profit centre targets are too tough, or if unfair cost allocations are made

Profit centres may pursue their own objectives rather than those of the broader business