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Profit Center

Written By
Paul Tracy
Updated January 16, 2021

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.

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