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Check out what a cost center is and how to define ir in your company

It is not surprising that the job of running a small or medium business involves great management skills in the various departments of the company, such as in inventory, personnel, customer service, and finance management. When the entrepreneur is unable to efficiently structure their company sectors, the chances of stalling the project are much greater. This is because, in order to maintain the health of the business, all internal activities need to be aligned with the company’s growth objectives.

For this to be achieved, managers should fully understand each specification and strategic concept linked to their enterprise. In the case of the financial sector, this fact is even more important, as it involves the balance of business expenses and investments. In this sense, a factor of great relevance that we can mention concerns the cost center, since it encompasses the organization of a large part of the corporation’s finances.

Not being aware of the employability and importance of this topic is one of the main causes of structural issues in companies. If this is your case – if you have no knowledge about it – we have prepared this article with the main information. Read on and stay on top of it!

What is a cost center?

At first, it is necessary to understand what the cost center in a company consists of. This concept is basically related to a unit within the business, which can be a department or a type of financial project, that involves revenues and expenses, contributes to the simplification of data analysis, and helps in the managerial decision-making.

We can see that the cost center contributes to make the company more efficient by distributing strategic resources to the points where there is the greatest potential for return. By understanding the specifications of each sector, it is also possible to identify where there is more spending and to measure the performance of each one of them.

What are the types of cost center?

Cost center can be practiced on the market in two different ways: productive cost center and nonproductive cost center. Understanding its specifications and differences is also an important point for entrepreneurs. Thus, read on to learn what is established in each of these cost center models!

Productive cost center

The productive cost center, which can also be referred to as direct cost center, is an area that strongly influences the input of resources in the business. It is further subdivided into two types, the first of which is directly linked to the production or provision of services, as is the case with the production lines in a factory or, also, a law firm in your legal department.

As for the other type of productive cost center, we can point out that it is linked to the sales and marketing activities of a company, being essential for the entry of revenues, even without production.

Nonproductive cost center

Also referred to as indirect or auxiliary, the nonproductive cost center does not have a direct influence in terms of the input of resources in the company. As such, this type may generate only disbursements for the company, but it is important for the business to operate. As examples, we can mention the financial and human resources sectors as a company’s nonproductive cost center.

What are the benefits of using the cost center in the company?

As already mentioned, when employing the cost center strategy in your company, it is possible to obtain great advantages. So learn more about the main benefits of adopting this business model!

Makes financial control easier

Establishing an efficient financial control within the company is often challenging within the business universe. However, by using the cost center in your finance strategy, it is possible to guarantee a more effective management of the business activities, as each process is evaluated in a clearer and more objective way, ensuring that managers have a complete view of the financial parameters of each department.

Ensures greater accuracy in analyses

Another major benefit is linked to a greater accuracy in business performance analyses. In this regard, when all processes are jointly assessed, the analysis may not be fully effective, as it becomes more difficult to evaluate what is going wrong or well within the company. For this reason, the cost center is a fundamental measure for leaders to better manage their actions and obtain the continuous growth of the enterprise.

Helps to reduce costs

Entrepreneurs who can implement a good cost center strategy are able to develop all their productive activities, as well as identify the company sectors that are spending more than necessary. Thus, it is possible to redefine the financial plan so as to increase the investment at the points where there will actually be a return for the business and, thus, reduce costs.

How to define the cost center in your company?

In order to define the cost center in your company, it is necessary to first divide the business activities in strategic areas. Within this process, you should be very clear of how much is being spent in each area and what your income with the investment process is. For this to be done as efficiently as possible, the use of cost management software can be an excellent option.

This is because this tool contributes to an integrated management, which allows getting advantages such as better control of deadlines, direction of resources with greater efficiency, improvement in productivity etc. That way, it is possible to have a better organization of the company’s finances, ensuring its sustainability.

So that was the main information about what is and how to use the cost center in your company. It is worth mentioning that, among the main factors that should be considered when defining the company’s cost center, it is necessary that managers assess the dimension of their business, as well as its specific needs, so that they can outline strategies that are more consistent with the reality of their company.

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