Profit Center: Explained

What is it, how to calculate it, formula, why it's important

As a CFO of a company, I am always looking for ways to generate more revenue for the business. One way to accomplish this is by creating a profit center. But what exactly is a profit center?


Simply put, a profit center is a department within a company that generates revenue and earns a profit. Unlike a cost center, which is a department that incurs expenses but does not directly contribute to the company's revenue, a profit center is responsible for generating income.


Creating a profit center can have a number of benefits for a company. For one, it can create a sense of ownership and responsibility within the department. When employees know that their department is responsible for generating revenue, they are more likely to take their jobs seriously and work harder to achieve their goals. Additionally, creating a profit center can help to diversify the company's revenue streams, which can help to insulate the business from economic downturns or other unforeseen events.


There are many examples of profit centers within a company. A sales department, for instance, is a classic example of a profit center. Its primary purpose is to generate revenue through the sale of products or services. Another example might be a rental company that generates revenue by renting out equipment or vehicles. Even a marketing department could be considered a profit center if it's responsible for generating leads and sales.

Implementing a Profit Center

So how does one go about implementing a profit center within a company? To start, you'll need to identify a department or area within the business that could be the basis for a profit center. This could be an existing department or a new one that you create from scratch. Once you've identified the department, you'll need to set revenue and profit goals for the team. This could include targets for new customers, revenue growth, or profit margins.

It's important to note that not every department is well-suited to becoming a profit center. In some cases, it may be more appropriate to keep a particular department as a cost center, focusing on reducing expenses rather than generating revenue.


Creating a profit center can come with its own set of challenges. Perhaps the biggest challenge is ensuring that the department is properly aligned with the company's overall goals and mission. A profit center that is too focused on generating revenue at all costs can sometimes lose sight of the bigger picture. Additionally, creating a profit center can sometimes lead to internal competition between departments as they compete for resources and attention.


In conclusion, creating a profit center can be an effective way to generate additional revenue and diversify a company's income streams. When done correctly, it can also help to create a sense of ownership and responsibility within the department, leading to improved performance and results. However, it's important to carefully consider which department to turn into a profit center and to set realistic revenue and profit goals. With these factors in mind, your company can successfully implement a profit center and reap its many benefits.

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