Profit Center

AAA

DEFINITION of 'Profit Center'

A branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation. A profit center is responsible for generating its own results and earnings, and as such, its managers generally have decision-making authority related to product pricing and operating expenses. Profit centers are crucial in determining which units are the most and least profitable within an organization.

INVESTOPEDIA EXPLAINS 'Profit Center'

The concept of profit centers enables a company's executives and management to determine how best to focus its resources to maximize profitability. In order to optimize profits, management may decide to allocate more resources to highly profitable areas, while reducing allocations to less profitable or loss-making units.

Not all units within an organization can be tracked as profit centers. This is especially applicable to departments that provide an essential service within an organization, but do not generate their own revenues. Some examples of these include the research department within a broker-dealer, the administration arm of a company, and a unit that provides after-sales support in an organization.

RELATED TERMS
  1. Investment Center

    A business unit that can utilize capital to directly contribute ...
  2. Conglomerate

    A corporation that is made up of a number of different, seemingly ...
  3. Revenue

    The amount of money that a company actually receives during a ...
  4. Expense

    1. The economic costs that a business incurs through its operations ...
  5. Investment Income Ratio

    The ratio of an insurance company’s net investment income to ...
  6. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
RELATED FAQS
  1. What advantages does EBTIDA-margin have over other profitability ratios?

    The advantages that EBITDA margin has over other profitability ratios is that it measures a company's financial performance ... Read Full Answer >>
  2. How does portfolio management software work?

    There are numerous varieties of portfolio management software. The essential function of portfolio management software is ... Read Full Answer >>
  3. How can I use market capitalization to evaluate a stock?

    Market capitalization represents the market value for an entire company. Investors can compare market cap to financial data ... Read Full Answer >>
  4. What are some ways a company can improve on its Return on Capital Employed (ROCE)?

    Options available to a company seeking to improve on its return on capital employed (ROCE) ratio include reducing costs, ... Read Full Answer >>
  5. How does the law of diminishing returns affect marginal revenue?

    The law of diminishing returns is better thought of as the law of increasing opportunity costs. The law states that -- if ... Read Full Answer >>
  6. How does DuPont Analysis measure operating efficiency?

    The basic DuPont analysis formula, sometimes called the three-step DuPont model, uses net profit margin as its measure for ... Read Full Answer >>
Related Articles
  1. Insurance

    Evaluating The Board Of Directors

    Corporate structure can tell you a lot about a company's potential. Learn more here.
  2. Investing Basics

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  3. Fundamental Analysis

    Interpreting A Company's IPO Prospectus Report

    Learn to decipher the secret language of the IPO prospectus report - it can tell you a lot about a company's future.
  4. Markets

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  5. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  6. Economics

    Explaining the EBITDA Margin

    EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
  7. Investing

    Why Cash Management Is Key To Business Success

    Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
  8. Economics

    What is Net Margin?

    The ratio of net profits to revenues for a company that shows how much of each dollar earned by the company is translated into profits.
  9. Active Trading Fundamentals

    How To Avoid The 5 Most Dangerous Market Scenarios

    Recognizing the five most dangerous market scenarios can save a fortune in avoidable losses, setting the stage for long term success.
  10. Active Trading Fundamentals

    Are You Ready To Be A Professional Trader?

    Here's help in making the quantum leap from novice to crackerjack trader.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center