About Profit Centers and Cost Centers

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Many companies use cost centers to focus on individual organizations that contribute directly to operating costs, but which contribute only indirectly to company revenue or profit. Examples might include office administration, accounting, information technology, human resources management, or facilities operations.

When a company unit contributes more directly to revenue and profit, it is more likely that a profit center approach will provide the visibility into its operations that is needed. Examples of profit centers often include sales operations, and manufacturing operations.

In the gray area between these two categories are the units that can be defined either way, depending upon management's philosophy about how the business works, including examples like product marketing or product management and product engineering.

Using the opentaps accounting tags it is possible to set up general ledger accounts, in the main company ledger tree, to capture the transactions of a specific center (of either kind) and to then create the reports for only the accounts that carry the unique tag of that particular center.

If the tagging is done for all the specific center accounts involved, and if there are a complete set of accounts for the center to be reported, then the reports can be a balanced set, just like the full company reports should be a balanced set. More about this topic on the use of tags is available in the section, Accounting Tags.

The advantage of a system like opentaps Financials comes from the fact that the accounting and reporting are already integrated and highly automated, and setting up the structures for centers is straight forward. Thus businesses of modest size can implement very good visibility into their operations if they choose to do so. Then, they can have the dual advantages of agility that comes with modest size, and excellent financial visibility that businesses with larger overhead have enjoyed in the past. The old term 'economy of scale' can start to take on new variations.