If you think you are making money on a certain segment of your business, but have no concrete proof, this is a sure sign that you absolutely need cost-center accounting. In today’s competitive marketplace, it is vital to know with certainty which parts of your operation are providing you the best return. The best way to optimize profit at any business is through the appropriate use of cost centers.
Mention cost centers and immediately some business owners think their operations are too small to bother with the extra accounting. On the other hand, some large businesses assume their operations are too complex to split out into cost centers without complete disruption of their well-established accounting system. Although both assumptions are common, both are naive.
For the small family business, cost centers can be a lifesaver. When a wholesale business is thrown in with his retail business, it’s almost impossible for him to know how much money he is making and where he is making it. How does he know whether to cut back or expand each part of his business? Cost centers are the only solution.
After implementing cost-center accounting, more than one small family business has had a loud wake-up call. Some have actually found out that the areas they are expanding were actually losers!
For larger family businesses, breaking out a huge company into cost centers sounds like an accounting nightmare. A worse nightmare, however, is finding out years down the road that only 75% of the company’s operations were making money while the other 25% was unprofitable and eating away at the bottom-line profit. Although the bottom-line was healthy, it could have been a lot healthier without the losers!
For companies with their own fleet of trucks, the first cost center implemented should be a transportation division. It is vital to know your transportation you sell wholesale or are simply using your fleet for goods distribution to your own stores. For all businesses who struggle with the issue of when, if and how to use common carriers, a transportation cost center provides accurate information for the most economical decision.
Beyond the initial transportation cost center, split out each sector of your operations that is significantly different from other sectors.
When you implement cost centers, begin simply. Your goal in implementing cost centers is to gain just enough insight to facilitate profit-maximizing management decisions. You can always add more centers later to fine-tune your information to a higher degree.
