In the 19th century, there is an Italian Economist, Vilfredo Pareto who believed that 80% of the effects we see right now are the result of 20% causes. If we bring it to the business world, then 80% out of the company’s profit can be given to 20% of the company’s clients, products, or operations.
Mostly, the profit center becomes the central profit for the company’s overall strategy. It is the part of the company where the management relies on its bottom line profit.
Later on, the company’s ability to leverage those profits and develop its other aspects will highly affect its long term success.
The Example
Microsoft can be a perfect example of a profit center. As we all know, this company owns various products, from a video game console to a search engine. Yet, its major profit center is in its Windows operating system and, of course, the Microsoft Office software.
When it first launched its Xbox console in 2001, Microsoft relied on the software sales and invested the profit on the game development. The profit center keeps Microsoft stay afloat.
As the whole company relies on it, the executive who is responsible for it faces a much more difficult job. They have to focus on generating more sales and decreasing the production cost at the same time.
A failure from that executive will significantly disturb the entire company.
Profit Center vs. Cost Center
On the contrary to the profit center manager, the cost center manager has to only focus on the ways to stay within the budget. A cost center is a department which also has a significant role for the company.
Usually, the cost center of a company operates red ink during the upfront losses. The effective operations of this department will result in a much richer company.
