What is a Profit Center?
A profit center is a part of a company that directly adds to its profits.
How Does a Profit Center Work?
A company may have a variety of distinct departments, divisions, or operating groups, each with separate responsibilities and each contributing to the overall success of a company. Cost centers, for example, such as accounting, auditing, or inventory control, have costs, but do not contribute revenues. As a result, they do not produce profits. A profit center, on the other hand, is directly involved in producing revenues, and, if it is managed well, its revenues exceed its costs and it produces a profit.
Why Does a Profit Center Matter?
A profit center must be carefully managed to ensure that the sales generating activities lead to more revenues than the cost of those activities, thus producing a profit. Creating separate profit centers within a company allow the management to evaluate the profitability of each unit or business activity. When assessing a company, it is useful for an investor to classify various components of a business into cost and profit centers, allowing the investor to evaluate the prospects of various divisions on a stand-alone or restructured basis and the allocation or elimination of the costs found in the cost centers.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Believe it or not, investing can be a lot like putting your wardrobe together. You can mix and...Read More →
How are Triple Net Leases and REITs Linked? Triple net leases are often the result of a ...Read More →