Investment Center Definition - Investopedia

An investment center is a center that is responsible for its own revenues, expenses, and assets and manages its own financial statements which are typically a ... CorporateFinance&Accounting CorporateFinance WhatIsanInvestmentCenter? Aninvestmentcenterisabusinessunitinafirmthatcanutilizecapitaltocontributedirectlytoacompany'sprofitability. Youmaycompareandcontrastsomeparallelsliketheterms"profitcenter"or"costcenter." Companiesevaluatetheperformanceofaninvestmentcenteraccordingtotherevenuesitbringsinthroughinvestmentsincapitalassetscomparedtotheoverallexpenses. Aninvestmentcenterissometimescalledaninvestmentdivision. KeyTakeaways Aninvestmentcenterisabusinessunitthatafirmutilizeswithitsowncapitaltogeneratereturnsthatbenefitthefirm.Thefinancingarmofanautomobilemakerordepartmentstoreisacommonexampleofaninvestmentcenter.Investmentcentersareincreasinglyimportantforfirmsasfinancializationleadscompaniestoseekprofitsfrominvestmentandlendingactivitiesinadditiontocoreproduction. UnderstandingInvestmentCenters Thedifferentdepartmentalunitswithinacompanyarecategorizedaseithergeneratingprofitsorrunningexpenses.Organizationaldepartmentsareclassifiedintothreedifferentunits:costcenter,profitcenter,andinvestmentcenter.Acostcenterfocusesonminimizingcostsandisassessedbyhowmuchexpensesitincurs. Examplesofdepartmentsthatmakeupthecostcenterarethehumanresourceandmarketingdepartments.Aprofitcenterisevaluatedontheamountofprofitthatisgeneratedandattemptstoincreaseprofitsbyincreasingsalesorreducingcosts.Unitsthatfallunderaprofitcenterincludethemanufacturingandsalesdepartment.Inadditiontodepartments,profitandcostcenterscanbedivisions,projects,teams,subsidiarycompanies,productionlines,ormachines. Aninvestmentcenterisacenterthatisresponsibleforitsownrevenues,expenses,andassetsandmanagesitsownfinancialstatementswhicharetypicallyabalancesheetandanincomestatement.Becausecosts,revenue,andassetshavetobeidentifiedseparately,aninvestmentcenterwouldusuallybeasubsidiarycompanyoradivision. Onecanclassifyaninvestmentcenterasanextensionoftheprofitcenterwhererevenuesandexpensesaremeasured.However,onlyinaninvestmentcenteraretheassetsemployedalsomeasuredandcomparedtotheprofitmade. InvestmentCentervs.ProfitCenter Insteadoflookingathowmuchprofitorexpensesaunithasaswithafirm'sprofitcenters,theinvestmentcenterfocusesongeneratingreturnsonthefixedassetsorworkingcapitalinvestedspecificallyintheinvestmentcenter. Unlikeaprofitcenter,aninvestmentcentermightinvestinactivitiesandassetsthatarenotnecessarilyrelatedtothecompany'soperations.Itcouldbeinvestmentsoracquisitionsofothercompaniesenablingdiversificationofthecompany'srisk.Anewtrendistheproliferationofventurearmswithinestablishedcorporationstoenableinvestmentsinthenextwaveoftrendsthroughacquiringstakesinstartups. Insimplerterms,theperformanceofadepartmentisanalyzedbyexaminingtheassetsandresourcesgiventothedepartmentandhowwellitusedthoseassetstogeneraterevenuescomparedwithitsoverallexpenses.Byfocusingonreturnoncapital,theinvestmentcenterphilosophygivesamoreaccuratepictureofhowmuchadivisioniscontributingtotheeconomicwell-beingofthecompany. Usingthisapproachofmeasuringadepartment’sperformance,managershaveinsightastowhethertoincreasecapitaltoincreaseprofitsorwhethertoshutdownadepartmentthatisinefficientlymakinguseofitsinvestedcapital.Aninvestmentcenterthatcannotearnareturnoninvestedfundsinexcessofthecostofthosefundsisdeemednoteconomicallyprofitable. InvestmentCentervs.CostCenter Aninvestmentcenterisdifferentfromacostcenter,whichdoesnotdirectlycontributetothecompany’sprofitandisevaluatedaccordingtothecostitincurstorunitsoperations.Moreover,unlikeaprofitcenter,investmentcenterscanutilizecapitalinordertopurchaseotherassets. Becauseofthiscomplexity,companieshavetouseavarietyofmetrics,includingreturnoninvestment(ROI),residualincome,andeconomicvalueadded(EVA)toevaluatetheperformanceofadepartment.Forexample,amanagercancomparetheROItothecostofcapitaltoevaluateadivision’sperformance.IftheROIis9%andthecostofcapitalis13%,themanagercanconcludethattheinvestmentcenterismanagingitscapitalorassetspoorly. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms ReturnonInvestment(ROI) Returnoninvestment(ROI)isa performancemeasureusedtoevaluatetheefficiencyofaninvestmentorcomparetheefficiencyofseveralinvestments. more ReturnonAssets(ROA) Returnonassets(ROA)isanindicatorofhowprofitableacompanyisrelativetoitstotalassets. more WhatIsCostAccounting? Costaccountingisaformofmanagerialaccountingthataimstocaptureacompany'stotalcostofproductionbyassessingitsvariableandfixedcosts. more EarningsBeforeInterest,Taxes,Depreciation&Amortization(EBITDA) EBITDA,orearningsbeforeinterest,taxes,depreciation,andamortization,isameasureofacompany’soverallfinancialperformance. more UnderstandingProfitCenters Aprofitcenterisabranchordivisionofacompanythatdirectlyaddstothecorporation'sbottomlineprofitability.Assuch,itistreatedasaseparatebusinesswithrevenuesaccountedforonastandalonebasisandbalancesheet. more ReadingIntoHumanCapital Humancapitalisanintangibleassetorqualitynotlistedonacompany'sbalancesheet.Itcanbeclassifiedastheeconomicvalueofaworker'sexperienceandskills. more PartnerLinks RelatedArticles FinancialAnalysis HowtoCalculateReturnonInvestment(ROI) DividendStocks 5ReasonsWhyDividendsMattertoInvestors FinancialStatements HowtoEvaluateaCompany'sBalanceSheet FinancialStatements TheThreeMajorFinancialStatements:HowThey'reInterconnected CorporateFinance AnIntroductiontoCapitalBudgeting Tools HowReturnonEquityCanHelpUncoverProfitableStocks