What is an 'Investment Center'

An investment center is a business unit that can utilize capital to contribute directly to a company's profitability. Companies evaluate the performance of an investment center according to the revenues it brings in through investments in capital assets compared to the overall expenses.

An investment center is sometimes called an investment division.

BREAKING DOWN 'Investment Center'

The different departmental units within a company are categorized as either generating profits or running expenses. Organizational departments are classified into three different units: cost center, profit center, and investment center. A cost center focuses on minimizing costs and is assessed by how much expenses it incurs. Examples of departments that make up the cost center are the human resource and marketing departments. A profit center is evaluated on the amount of profit that is generated and attempts to increase profits by increasing sales and/or reducing costs. Units that fall under a profit center include the manufacturing and sales department. In addition to departments, profit and cost centers can be divisions, projects, teams, subsidiary companies, production lines, or machines.

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 balance sheet and an income statement. Because costs, revenue, and assets have to be identified separately, an investment center would usually be a subsidiary company or a division. One can classify an investment center as an extension of the profit center where revenues and expenses are measured. However, only in an investment center are the assets employed also measured and compared to the profit made.

Instead of looking at how much profit or expenses a unit has, the investment center focuses on generating returns on the fixed assets or working capital invested specifically in the investment center. In simpler terms, the performance of a department is analyzed by examining the assets and resources given to the department and how well it used those assets to generate revenues compared with its overall expenses. By focusing on return on capital, the investment center philosophy gives a more accurate picture of how much a division is contributing to the economic well-being of the company. Using this approach of measuring a department’s performance, managers have insight as to whether to increase capital to increase profits or whether to shut down a department that is inefficiently making use of its invested capital. An investment center that cannot earn a return on invested funds in excess of the cost of those funds is deemed not economically profitable.

An investment center is different from a cost center, which does not directly contribute to the company’s profit and is evaluated according to the cost it incurs to run its operations. Moreover, unlike a profit center, investment centers can utilize capital in order to purchase other assets. Because of this complexity, companies have to use a variety of metrics, including return on investment (ROI), residual income, and economic value added (EVA) to evaluate the performance of a department. For example, a manager can compare the ROI to the cost of capital to evaluate a division’s performance. If the ROI is 9% and cost of capital is 13%, the manager can conclude that the investment center is managing its capital or assets poorly.

 

RELATED TERMS
  1. Profit Center

    A profit center is a branch or division of a company that is ...
  2. Activity Center

    An activity center is a designated cost accounting area where ...
  3. Power Center

    A power center is a large outdoor shopping mall that usually ...
  4. Profit

    Profit is the financial benefit realized when the amount of revenue ...
  5. Reinvoicing Center

    Reinvoicing centers are subsidiaries or separate divisions of ...
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate ...
Related Articles
  1. Investing

    Alexa Might Soon Be Answering Call Center Queries

    Amazon reportedly plans to release cloud-based tools that will enable customers to configure their own call center.
  2. Investing

    Merrill Edge to Open 600 New Investment Centers

    Merrill Edge is gearing up to open 600 more physical investment centers by 2020.
  3. Investing

    UBS Learns From Merrill Edge, Will Boost Number of Advisors

    Taking a page from Merrill Edge, UBS is beefing up the number of financial advisors in its Wealth Advice Center by 25%.
  4. Insights

    The Investopedia Election Center

    Follow all the election news – from results to deep-dive analysis – on the Investopedia Election Center.
  5. Investing

    FYI on ROI: A guide to calculating return on investment

    Return on investment (ROI) measures how successful an investment is performing. In this article, we'll show you how to calculate ROI and how it can be interpreted.
  6. Tech

    Big Dividends From Big Data

    As internet traffic continues to skyrocket, the datacenter operators are poised to be a backdoor player in the growth of cloud computing and our data creation.
  7. Investing

    Qualcomm Challenges Intel's Data Center Dominance

    In what it describes as an effort to  reshape the future of data center computing, Qualcomm (NASDAQ: QCOM) unveiled and demoed the world's first 10 nanometer server processor, targeting the ...
  8. Investing

    3 Profit Metrics Every Investors Should Understand

    In this article, you will understand how the three metrics gross profit, operating profit, and net profit helps investors see how a company is performing.
  9. Investing

    Analysts Put NVDA on a Stairway to Heaven

    Analysts are projecting significant growth for NVIDIA over the next two years. Can it live up to the hype?
  10. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
RELATED FAQS
  1. How do economic profit and accounting profit differ?

    Accounting profit is the profit after costs and expenses are subtracted from total revenue while economic profit factors ... Read Answer >>
  2. How should I analyze a company's financial statements?

    Discover how investors and analysts use a company’s financial statements to evaluate a company's financial health and investment ... Read Answer >>
  3. Gross Profit, Operating Profit and Net Income

    Find out how to calculate gross profit, operating profit, and net income. Learn about the relationships between theses types ... Read Answer >>
  4. What is the difference between operating margin and contribution margin?

    Understand the difference between two measures of profitability, operating margin and contribution margin, and the purpose ... Read Answer >>
  5. What are typical examples of capitalized costs within a company?

    Learn examples of company capitalized costs, including expenses incurred to put fixed assets, software development costs, ... Read Answer >>
  6. How do operating expenses affect profit?

    Explore how operating expenses and the cost of goods sold can either increase or decrease a company's profits on an income ... Read Answer >>
Trading Center