Which of my product lines are yielding the greatest margins?
Did I earn a profit from Location A last year?
Why is my top line revenue growth not attributing to an increase in my bottom-line results?
Which of my fundraising activities were the best utilization of our resources?
As a business owner or nonprofit organization, if you find that the answers to these questions aren’t a few keystrokes away, you most likely haven’t established profit center reporting into your accounting system. And now is the perfect time to do it!
Profit center reporting is a tool that management can use to review operational profit and loss results for a department, branch, product line, location or activity. It will also provide more meaning to overall profit and loss statements as it allows you to dissect the operational results into meaningful data that can be used in strategic planning.
Establishing Profit Centers
You may not know that many accounting systems, such as QuickBooks, have the capability to track this type of operational data for you. It is usually an option that can be simply activated and requires little set up. Your accountant can help you with set up if you need additional assistance.
Once profit center reporting is made available, the transactional processing, sales, and billing functions will need some tweaking. Each transaction, activity, product or service item needs a profit center code to provide the revenue stream for the reporting. This can usually be captured as you set up the individual sales categories or lists in your accounting system.
Segregating the cost structure for the profit center reporting may be more complex because there will be different categories of costs to consider. For instance, some costs are tied directly to a profit center and others are general in nature and may relate to several profit centers. These general costs may need to be grouped together and allocated into the profit centers on a monthly basis through a general journal entry. Your accountant can assist you in determining a reasonable basis to allocate such costs in order to provide you with meaningful data.
Using Profit Center Reporting for Decision Making
Generating reports by profit center is a byproduct of your transactional processes. With profit center reporting in place, management will be able to compare select profit centers to identify which units provide the highest sales volume, why different locations’ cost structures yield different results, and how both of these attributes affect the overall entity’s operational results.
Through this process, management can:
- Evaluate whether various business units such as product lines and locations should continue or discontinue
- Streamline operations
- Hire additional employees
- Outsource key functions
- Forecast future transactions and operations using reliable historical data
With a few changes to your accounting system structure and transactional processing, a wealth of data can be at your fingertips. The information gleaned through profit center reporting will assist you in understanding your operational activities more clearly, allowing you to make informed decisions and initiate strategic planning. Please contact Cray Kaiser if you’d like help setting up your profit center reporting.