Let's google profit centre management. We can summarise most of the search results as follows:

• Independent operational units responsible for revenue, expense, and profit
• Everything is counted for financial performance

Little is discussed about the vast scope of organizational management applied in profit centre management.

I spent 25 years in profit centre management in various capacities, from management trainee to CEO. I discovered that profit centre management is about more than just running businesses for profit. But it is a tried-and-true professional approach for organizational performance in total. It step-up business growth and boosts profitability.

Redefining Profit Centre Management

Profit centre management is a management approach and a business tool for planning, executing, and controlling organizational functions. The scope includes all operational and functional areas, such as financial accounting, human resources, materials, sales, production, and performance. 

Profit centre management ensures all required processes are in place. Examples include cashflow plans, debtor reviews, sales tracking, inventory reports, cost control plan, recruitment process, and production plans.

Profit centre management is a methodology that evolved by monitoring and analysis of performance parameters. When you need to improve some operations, you either innovate or adopt a best practice from someone else. The technique used is iteration. You keep repeating process improvement methods until you invent a new one. The Kaizen principle, or continuous improvement, is applied to each aspect of business operations.

Need to Discuss Profit Centre Management among Businesses

Every business owner employs distinct ways to spur growth and profitability. It differs from one person to the next and from one business to the next. However, all corporate and professional firms take the same approach to drive growth and profitability. It is "Profit centre management". 

Despite the fact that all professional businesses use profit centre management, only some teach it to solo entrepreneurs.

Solo entrepreneurs unfamiliar with the profit centre management strategy may overlook some of the company's strengths. It might be a chance for growth, a business challenge, a revenue leak, or even untapped possibilities that the owners have never considered. And this is what businesses gain from profit centre management.

One or two key players manage businesses. They are tied up with the daily show and involved in high-priority issues. It could be managing funds, meeting clients, scaling up production, or sourcing the raw material. Then, by all chance, companies would be missing on other areas like inventory management, debt recovery, sales tracking, or recruitment.

The profit centre management approach empowers business owners to balance all activities. It delegates responsibilities and makes people accountable. You can focus on more productive areas and reduce firefighting. The objective is to grow the business and boost profits.

Action needs to be at two stages:

• Build awareness among businesses about profit centre management approach and subsequent benefits for business
• Handhold businesses to adopt profit centre management

Do Businesses really need Profit Centre Management?

Business owners can decide by answering the questions down below:

• How many sales/business is expected this month? Am I getting enough enquiries/sales/customers
• How much money is blocked in stock (how many days of stock, the value of slow-moving and dead stocks)? Do I have sufficient fast-moving stock?
• Is every employee given targets, and is their performance being monitored? Are performers rewarded, and are corrective actions done for underperformers?
• What will be this month's turnover, income, and expenses? How much cash will I receive this month, and how much do I have to pay?
• What profit will I be making this month, and how much will I make for this year?
• Where is the money spread in your business? Stock, machinery, debtors? How do I recover it?
• How do we decide on investment, employee hiring, and expansion? Is it instantaneous or planned?
• Which parameters are growing/de-growing? Is it as per budget?
• Am I retaining my customers or losing them? How many new customers are added?
• Which are the verticals showing progress? Which one is degrowing?
• Do entire employees know the organizational goals and targets? Does every employee have his targets set? Who is reviewing their performance?
• How effective are cost-controlling plans and actions?

We can expand this list as much as we want. The list will keep on growing as companies move forward.

If you feel there are a good number of such questions to be addressed, then profit centre management is worth it.

Business owners should be asking these questions to their people. Profit centre management empowers you to ask such questions by working with real-time data and pre-set targets.

Profit Centre Management Processes

It contains a process and leadership approach.The process identifies what is to be done. Leadership gets 'how' things are done and by 'whom.'

A few processes are listed below:

• Financial Accounting – Annual Operating Plan (AOP), Monthly Budget, P&L (Profit & Loss) Report, Cashflow Planning, Debtor's Ageing Report, Cost controlling
• Materials – Inventory Reports, ABC and FMS Analysis, Systematic order plan, Storage and Handling
• HR – Employee productivity, Recruitment/Training/Induction Plan, Career Plan
• Performance – MIS, Dashboards, Targets, and Reviews
• Manufacturing – Production plan, cost management, employee productivity reports
• Quality – QA & QC, Variation and Deviations, Checks and Balances
• Sales – Sales Projection, Lead management
• CRM – customer retention plan, complaint redressal measures

To summarise, profit centre management brings a matrix to every company operation. It measures resources utilization of people, process, infra, technology, and money. Business performance is forecasted, and targets are set. Profit centre management reviews achievement against the target.

Benefits of Profit Centre Management

• Complete control of financial management
• Cash flow forecasting in advance
• Focus and control on revenue verticals
• Individual focus on direct, fixed, and variable costs
• Realistic Cost control
• Precise decisions on employee costs, inventory, machinery, and funds
• Company performance is meticulously planned, monitored, and controlled in advance
• Finance department empowered as a guiding and controlling entity in the company
• Key decision-makers are awarded more time to make decisions

Way Forward

• Awareness building
• Government nodal agencies, professional service providers, and associations can build clusters of businesses to participate in basic level awareness of profit centre management
• Cohorts or workshops are the next steps in inducting businesses into this process
• Those who need handholding shall opt for consulting by an experienced professional

Interim management services are higher options where businesses seek the service of professionals on a short-term or part-time. Interim executives immediately take charge of the process and develop the workforce within businesses.

 

This article was contributed by our expert Narayanan Krishnamoorthy

Frequently Asked Questions Answered by Narayanan Krishnamoorthy

Q1. What determines the profit centre?

Small businesses can make the whole company a profit centre.

Mid-sized companies with multiple branches consider each unit as a profit center. Manufacturing companies can split production as one profit centre and other operations like sales as a different profit centre.

Companies with large operations can opt for options. It could be based on:

• Product line (for example, consumer goods, apparel, appliances, etc.)
• Geographical (regions, countries)
• Verticals (Sales, After Sales Service)

Large companies need to align profit centers to business strategy

Q2. How do you scale a business effectively using Profit Centres?

Working on revenue streams is the beginning of business scaling up. Instead of seeing a single source of revenue, the revenue stream is divided into multiple verticals. Individualized focus and tailored actions are enabled by multiple verticals.

Exploring other sources of income within the same operations or with little extra effort is next in scaling up. Petroleum dealers selling lubes are a well-known example.

Cost controlling is the third stage, and it equally contributes. Cost control does not limit to cutting down expenses. It means cutting down wasteful of non-productive expenses. It also deals with other resources like people, infra, technology, and materials. Saved resources like money, manpower, material, and infra are then redeployed to productive areas.

Q3. Why should we use cost centres and profit centres?

When companies want an operation to stand alone and perform, they must create a profit centre. A computer seller forming a network cabling division as new profit. The cabling division can do the work for their own customers or attract business from outside. 

When resource utilization needs to be maximized with meticulous cost control measures needed on one side and no focus is not required on revenue, a cost centre is adopted. State electricity board or many government companies work on this. 

A cost centre is an effective tool at the micro level too. Every car is booked as a cost centre in account books in the used car business. As every car consumes more than seven types of variable expenses (refurbishment cost, insurance, tyres/battery, commission, warranty fee, royalty)

Q4. What are some methods in profit centre planning?

The most commonly used methods are the use of an AOP (annual operating plan) by creating AOP for every individual profit or cost centres.

Subsequently, revenue verticals, other sources of income, cost control plan, budget, and finally, P&L (profit & loss) Report is developed for every operation.