Many businesses tend to focus on revenue as an indicator of financial health.  Common sense would indicate that greater revenue will lead to more profit.  This is far from true.  Not all revenue dollars are created equal.  Different parts of your business - whether it be different customers, locations or products – may be more profitable than others.  More importantly, some parts of your business might actually be money losers.  A careful profit center analysis can help you determine which parts of the business need help and which are doing well.

The Basics of Profit Center Analysis
Profit center analysis is a relatively simply process.  The first step is to identify the various parts of your business.  Common groups are done based on customers, products, or locations.  Additional breakdowns can be done for any group.  For example, you might look at product group profitability separately for each region.  Identifying the profit centers should be done with some care.  The key is to identify groups that have meaningful differences in revenue and costs.  For example, small volume buyers may require different servicing levels than larger customers.  Profit center analysis based on buyer volume will indicate if servicing costs are eroding profits.

The next step is to collect revenue and costs data for each profit center.  While you can retroactively assemble data, this process can be difficult and time consuming.  However, if your books are properly constructed, you can easily do profit center analysis.  Good bookkeeping practice will allocate revenue and expenses to the appropriate profit center.  A simple report can then be generated each month to allow you to compare different centers.

The first profit center analysis you conduct can be a real eye opener.  It is not uncommon to find parts of the business that are performing either better or worse than expected.  Even large, sophisticated companies have been surprised to find classes of customers that are money drains.  This has led some companies to “fire” customers that are unprofitable.  Equally valuable is monthly tracking of profit centers.  This helps you identify problems before they become serious.

When designed into your bookkeeping system and used properly, profit center analysis can improve profitability tremendously.  It can help identify previous unseen drags on profitability.  In addition, it can help guide management’s attention by more clearly identifying problem areas and opportunities for growth.  Most importantly, it provides hard data to guide decision-making as opposed to relying on vague impressions of what parts of your business are most profitable.

Our service insures your books will easily provide profit center analysis (included in our standard package).  This includes:

• Proper construction of the general ledger chart of accounts
• Accurate recording of data for each profit center
• Reporting formats that highlight each center's profitability