Difference Between Profit Center and Investment Center

Most companies (if not all of them) will have a Profit Center and an Investment Center. As profitability is the backbone of any business, not every section of the company will be involved in the direct generation of revenues.

Some of them are classified as costs but support the functioning of the company. Others are involved in assets, others are not. As a result, they have separated their businesses into partitions to maximize the strengths of each part separately.

For example, most companies have Profit Centers, Investment Centers, and Cost Centers which could all be in the same location but operating separately.

Profit Center vs Investment Center

The difference between the Investment Center and the Profit Center is that it takes care of revenues, costs, and assets, while the Profit Center deals with revenues and costs.

A Profit Center is a part of a business that is expected to make an identifiable contribution to the organization’s profit.

An Investment Center is an organization’s business unit that has the potential to use capital to directly increase the company’s profitability. The terms “Profit Center” and “Cost Center” are some examples of parallelism that you can compare and contrast.

Comparison Table Between Profit Center and Investment Center

Parameters of ComparisonProfit Center  Investment Center
DefinitionA section or branch of a business that is regarded as a standalone entity and is in charge of making choices about income and costs.An Investment center is a profit center that’s in charge of making investment decisions in addition to those that affect revenue and expenses.
Aspects of Capital Asset DecisionsDecisions about capital assets are taken up by top officials in corporate headquarters.In the investment centers, divisional managers make decisions.
Divisional manager’s authorityDivisional managers don’t have as much freedom to make investment decisions as investment centers do.Divisional managers of investment centers have a great degree of autonomy because they are permitted to make investment decisions.
Takes responsibility forRevenues and costs.Revenues, costs, and assets
ExamplesA store or a sales group whose success can be measured are examples of profit centers.A car manufacturer’s or department store’s investment center is its financial division.

What is a Profit Center?

A Profit Center is a company’s branch or division that is seen as existing independently. The administrators of a profit center can typically make decisions on the product, pricing, and operating costs.

 A profit center is in charge of producing its outcomes. Except for investments, all decisions affecting revenues and expenditures are made by managers in a profit center.

The top management at corporate headquarters makes decisions about investments, including buying and selling capital assets.

 Thanks to the existence of profit centers, it is easier for senior management to compare results and determine how much each profit center adds to overall corporate profits.

For instance, the international JKT Company manufactures high-end cosmetics. JKT has operations in 20 different nations. All 20 countries have manufacturing facilities where cosmetics are made. Each operation is run as a profit center in its native nation, with divisional managers in charge of all choices regarding costs and revenues.

The idea of profit centers helps management to choose how to effectively distribute resources inside the organization to optimize profitability via,

  1. Committing more funds to businesses with a high-profit margin.
  2. Boosting the efficiency of units that are loss-making units.
  3. Entities without a future should be abandoned.

What is an Investment Center?

An investment center is a profit center that also handles revenue and cost-related choices in addition to investment-related ones. Business units known as “investment centers” are able to use capital to increase a company’s profitability.

Businesses must choose between a number of options when it comes to investing in capital assets that support long-term viability. Among them are choices about capital asset purchases, sales, and upgrades. Continuing with the same illustration,

For instance, divisional managers in JKT have the power to choose which new capital assets to purchase, which ones to modernize, and which ones to dispose of. This authority extends beyond decisions involving revenues and costs.

The primary criterion for judging an investment center is the amount of money it brings in relative to the amount it invests in capital assets. The following financial metrics can be used individually or in combination by businesses to assess an investment center’s performance.

Main Differences Between Profit Center and Investment Center

  1. While a Profit Center handles revenues and costs, the Investment Center manages revenues, costs, and assets.
  2. While a profit center is a division or branch of a firm that is thought of as a separate entity and is in charge of choices pertaining to sales and costs, an investment center is a profit center that is in charge of investment decisions.
  3. An extension of the profit center where revenues and costs are calculated is what is referred to as an investment center. However, the assets used are just measured and compared to the profit earned in an investment center.
  4. Performance of profit centers is evaluated in relation to target profit. While the performance of investment centers is measured by some rate of return, typically return on investment (ROI) or residual income.
  5. Cost and profit centers have financial, motivating, and organizational uses. Advantages: aids in budget management; inspires employees. Disadvantages: It may be challenging, and may raise pressure. While in the opposite Investments don’t have that kind of pressure.

Conclusion

The main difference between profit centers and investment centers primarily refers to who makes decisions on the acquisition and disposition of capital assets: in profit centers, senior management, or divisional managers within the relevant business entity (in investment centers).

Due to their power over decisions, divisional managers in investment centers may be more strongly motivated than managers in profit centers.

The mindset of the senior management, the nature of the firm, and industry standards frequently determine whether business units are run as profit centers or investment centers.

References

  1. https://www.hbs.edu/ris/Publication%20Files/07-030.pdf
  2. https://www.proquest.com/openview/8825df7c5caa3c08db168611b98a2aa3/1?pq-origsite=gscholar&cbl=18750&diss=y
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