A Small Business Guide to Cost Centers | The Blueprint - The ...

Cost center activities are always included on your company's balance sheet. While a cost center contributes no revenue to a balance sheet, ... TheMotleyFool AboutTheBlueprint ReviewMethodology AdvertiserDisclosure Wemayreceivecompensationfromsomepartnersandadvertiserswhoseproductsappearhere.That’showwemakemoney.Compensationmayimpactwhereproductsareplacedonoursite,buteditorialopinions,scores,andreviewsareindependentfromtheadvertisingsideofTheBlueprintandourobjectivityisanintegralpartofwhoweare.Ourcommitmenttoyouiscompletehonesty:wewillneverallowadvertiserstoinfluenceouropinionofproductsthatappearonthissite. Enteryouremailaddress: Search OurTopPicks Accounting AccountEdgePro AccountEdgeProhasalltheaccountingfeaturesagrowingbusinessneeds,combiningthereliabilityofadesktopapplicationwiththeflexibilityofamobileappforthoseneedingon-the-goaccess. 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Accounting Construction COVID-19 EmailMarketing FieldService HumanResources ITSecurity ITSM Marketing ProjectManagement RealEstate RemoteWork SmallBusiness WomeninBusiness Searchforsoftwareandbusinesstopics: AdvertiserDisclosure Wemayreceivecompensationfromsomepartnersandadvertiserswhoseproductsappearhere.That’showwemakemoney.Compensationmayimpactwhereproductsareplacedonoursite,buteditorialopinions,scores,andreviewsareindependentfromtheadvertisingsideofTheBlueprintandourobjectivityisanintegralpartofwhoweare.Ourcommitmenttoyouiscompletehonesty:wewillneverallowadvertiserstoinfluenceouropinionofproductsthatappearonthissite. WhatIsaCostCenterandWhyAreTheyImportanttoYourBusiness? Asyourbusinessgrows,youmaystarttousecostcenters.Costcenters,whilenotrevenueproducers,canbenefityourbusinessinmanyways.Wecoverthosebenefitshere. 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Updated October6,2020 SaveasPDF Asabusinessowner,yourfocusislikelycenteredonmakingmoney.Butasimportantasitistoproducerevenue,thereareexpensesinvolvedinrunningyourbusinessaswell.Acostcenterisanemployeeoradepartmentwithinyourcompanythatperformsthoseexpense-bearing,necessarytasks.Forexample,ifyouhaveanHRdepartmentorevenasingleHRemployee,theywouldbeconsideredacostcenter.Costcentersprovidesupporttothebusinessinsomemanner.Costcentersdonotgeneraterevenuebutincurexpenses,whichdirectlyaffectsbothcashflowandyourincomestatement.Acostcenterperformstasksvitaltobusinessbutdoesnotgeneraterevenue.Source:maskbc.com.Overview:Whatisacostcenter?Costcentersareanimportantfunctionforanybusiness.Evenasmallbusinesscanbenefitfromacostcenter.Acostcentercanbeasingleperson,suchastheaccountingclerkresponsibleforenteringtransactionsintoyouraccountingsoftwareapplication,oritcouldbeanentirehumanresourcesdepartment.Costcentersprovideadministrativeandothersupporttorevenue-generatingactivities.Costcenteractivitiesarealwaysincludedonyourcompany’sbalancesheet.Whileacostcentercontributesnorevenuetoabalancesheet,ithasbothassetsandliabilities.Costcentervs.profitcenter:What'sthedifference?Acostcenterindirectlycontributestobusinessprofit,whileprofitcentersexisttoearnrevenue.Forexample,thepatientrelationscenteratalargehospitalwouldbeconsideredacostcenter,sinceitspurposeistomaintaingoodrelationshipswithpatients.Whilethisisanimportanttaskthatcanindirectlyincreaserevenuebykeepingpatientshappy,thepatientrelationscenterdoesnotearnaprofit.However,theelectivesurgerydepartmentatthatsamehospitalprovideselectivesurgicalprocedurestopatientsandwouldbeconsideredaprofitcenter,sinceitearnsrevenue.Largerbusinessesandotherorganizationsmayalsousearevenuecentertomanagesalesrevenue.Acostcenterisstructuredaroundexpenses,whileaprofitcenteriscenteredonprofit.Source:m-ize.comForexample,let’slookatDebra’sDepartmentStore.Debrapridesherselfonherwell-stockedshelvesofqualitymerchandise.Manyyearsago,Debra’sDepartmentStorebeganasasmall,localhardwarestore,butasDebraaddeddifferentdepartments,herrevenuegrew.Nowshehas10profitcenterswhichincludeclothing,electronics,furniture,drugs,andhomegoods,alongwithseveralothers.Butinordertokeepherbusinessrunningsmoothly,Debrahasestablishedseveralcostcentersincludingacustomerservicecenterthathandlesreturns,exchanges,andcustomerconcernsandcomplaints.ShehasalsobuiltanITdepartmentthatistaskedwithensuringthatallofthestore’scomputersrunsmoothly.WhileneitherthecustomerservicedepartmentnortheITdepartmentgeneratesanyrevenue,theyprovideavaluableservicebothinternally,bykeepingcomputersrunningsmoothly,andexternally,bykeepingcustomershappyandhelpingtosolveanyproblemsorconcernsthatmayarise.4benefitsofcostcentersInmostlargerbusinesses,costcentersareanecessity,providingaddedvaluetoabusiness.Whilethey’renotdesignedtomakeaprofit,theydoenhancetheprofitabilityofacompanybyprovidingthesebenefits.1.TheycreatehappiercustomersIfyousellgoodsandservices(andwhatbusinessdoesn’t),keepingyourcustomershappyisessential.No,notjustessential—it’salsoafull-timejob,whichiswhycreatingacustomerservicedepartmentisaworthyinvestmentforyourbusiness.Eventhoughyourcustomerservicedepartmentcostsmoneyratherthanmakesmoney,italsosettlesdisputes,solvesproblems,andessentiallykeepsyourcustomershappy.Andahappycustomerisusuallyaloyalcustomer.2.TheykeepthebusinessrunningsmoothlyWhileyousellgoodsandservices,who’sbehindthescenesensuringyourmachinesarekeptcleansotheyperformoptimally?WhomakessurethatTom’sspilledcoffeeiswipedup,thegarbagecansareemptied,andtheairconditioningandheatingisworkingproperly?Yourmaintenancestaff,that’swho.Whilethemachineoperatorsandorderfulfillmentpeoplearevitaltoyourbusiness,soarethepeoplewhomakeiteasierforthemtoperformtheirjobs.3.TheymanageyouremployeesWhenyoustarted,youworemanyhats.Maybeyoustilldo.Butasyourbusinessgrows,youknowyoucan’tcontinuetoeffectivelymanageallareasofyourbusiness,particularlyHRandpayroll.HRandpayrollcostcentersmanagetheentirehiringprocessfrominitialjobpostingtoreadingapplicationsandresumes,tomanagingtheentireinterviewprocess.Theyalsomanageemployeedisputes,investigatecomplaints,andensureyourbusinesscomplieswithstateandfederallaws.4.TheylookforinnovativeopportunitiesLet’snotforgettheimportanceoffinanceandaccounting.Whilethiscostcentermayhandlerevenue,italsohandlesfinancialstatementanalysis,servesasaresourcecostingarea,andhandlestaxes.Agoodfinanceandaccountingdepartmentalsoassessessalestrends,reviewsdifferentpricingstrategies,andreviewschangesintheindustry.Yourfinanceandaccountingstaffmayalsopinpointnewareasforyourbusinesstoexploreordeterminewhatproductsandservicesareleastandmostprofitable.HowacostcenterworksCostcentersmustbemindfuloforganizationexpenses,whilestillprovidingthenecessarysupportservices.Acostcenter,suchasaproductionorprofitcenter,hasabudgetthatneedstobemanaged.Becausethecostsincurredbycostcentersareinternalandusedtomakemanagementdecisions,costcentersusemanagerialaccountingtotrackdata.Usually,whenlayoffsoccur,theybegininthecostcenters,asthesepositionsarenotrevenuegenerators.ExampleofacostcenterGoingbacktoDebra’sDepartmentStore,Debrahasanaccountingstaffoffour:asenioraccountantandthreeclerks.Theyperformthesetasks.Accountspayable:Oneoftheaccountingclerkshandlesallaccountspayabletransactions,ensuringbillsareenteredproperlyandpaidpromptly.Accountsreceivable:Anotherclerkhandlesallaccountsreceivableforthebusiness,includingpostingcustomerpayments,followingupwithcustomersonpaymentstatus,andbeginningthecollectionprocessforlatepayments.Generalaccountingtasks:Debra’ssenioraccountingclerkhandlesmoreadvancedaccountingtaskssuchasrecordingdepreciationexpenses,managingpayrollandrelatedtaxexpenses,andpostingadjustingentries.Financialanalysis:Debra’saccountantrunsandanalyzesfinancialstatements,helpingthecompanypinpointareasthatneedimprovementandidentifyingdifferentwaystheycanincreaserevenue.Whilenoneofthesetasksgeneratesrevenue,theyareallessentialtothehealthandwell-beingofDebra’sbusiness.Ifbillsaren'tpaidontime,Debra’screditratingcoulddrop,affectingherabilitytopurchasegoodsforresellers.Ifpaymentsaren’tproperlycreditedtoacustomer’saccount,therecouldbeseriousrepercussions.Thesamegoesforpromptfollow-upofanylate-payingaccounts.Payrollmustbeprocessedwhenit’sdue,taxesmustbepaid,andcompanyperformancemustberegularlyanalyzedtokeepexpensestoaminimumwhilemaximizingrevenue.That’swhytheaccountingandfinancecostcenterissoimportanttoDebra’sbusiness.CostcenterscanhelpyoumanageyourbusinessAsyourbusinessgrows,thebookkeepingprocessnecessaryforyoursmallbusinesswillalsogrow.Whengrowthdoesoccur,youmaywanttocreateandmanagevariouscostcenters.Whileservingasaneffectivemanagementmethod,costcenterscanhelpyoubettertrackbusinessperformanceandrelatedexpenses,andifmanagedproperly,canalsohelpyourbusinessgrow. 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