Critical Cost Center Financial Reporting

Every profitable business draws in profits both directly and indirectly. These indirect profits are often brought in through units known as “cost centers,” or, more simply put, divisions that don’t specifically generate income, but contribute to the company’s overall ability to produce profits. For example, a human resources (HR) department for a large manufacturing company doesn’t generate profits in the same way the line workers do, but by managing employees, staying on top of paperwork, and handling legal documents, this department is critical for financial profit anyway. In financial planning, it’s crucial to understand the role of cost centers as a means of making your business successful.

Cost centers can take many forms. In addition to HR departments, an information technology (IT) division, accounting team, or maintenance crew all cost money to operate, but don’t specifically generate income. From a financial planning standpoint, it’s important to report on expenses allocated to these units in order to ensure that it is not costing more to operate them than is being indirectly drawn in.

Traditional financial reporting for profit centers measure costs versus profits to ensure that the latter is greater than the former. Financial reporting for cost centers, however, focuses solely on the expenses of that department alone. Often, the manager of said unit/department is responsible for adhering to a budget and optimizing resources in order to stay within that budget, since no profits will stretch those funds.

Often, “responsibility reporting” is the primary tool for financial reporting within cost centers, where the manager will report on all expenses (labor, materials, overhead costs, etc.) and organize by allocated budget and the actual expenses paid. This is where analysis can be conducted to identify where there is variance between the budgeted and actual amounts, and financial planning can come in. Ideally, these variances are areas where resources can be better optimized. For example, if the cost of operating a helpline is higher than originally allocated, financial planning can help to identify how to resolve this variance – rearranging schedules so that there are less employees during times with less calls, creating work from home opportunities to cut down on in-house costs, etc.

Cost centers are critical for nearly every company. These units indirectly contribute to overall success by improving the work environment for profit-generating employees, increasing customer satisfaction (and therefore increasing sales), and improving the workability of technology and tools needed to conduct profitable tasks. Planning and reporting accurately on these departments helps to ensure that profits remain successful over time.