Definition: An investment center, also called and investment division, is a way to classify and evaluate a department based on its revenues, costs, and asset investments. Instead of categorizing departments into cost centers and profit centers, management often looks at departments as investment centers. In other words, it’s a different way of looking at and evaluating how divisions and departments perform.
What Does Investment Center Mean?
Profit and cost centers typically focus on the amount of profits they contribute to the company. Profit centers lump segments, like the sales department and manufacturing department, together that generate revenues and directly produce profits for the bottom line of the company. Cost centers, like the marketing and human resource departments, don’t directly contribute to the company’s profits. This is the traditional way of looking at departments. They either generate profits, or they contribute costs.
The investment center philosophy uses a different approach to analyzing a department’s performance by looking at the assets and resources given to that department and evaluating how well it used those assets to produce revenues compared with its overall expenses. An investment center also can use capital and funding to purchase other assets to increase revenues.
In short, managers analyze investment centers by the amount of return they produce on the capital they use. Instead of looking at the overall profits or costs required to run the department like a profit or cost center, management focuses on the return on the department. This type of outlook is useful for business scaling. Management can measure percentage of returns based on an amount of capital and increase the invested capital to increase the returns. Conversely, poorly performing centers will either be shut down or have their capital amounts reduced.
Management typically uses financial ratios like the return on investment ratio and the economic value added calculation to evaluate how well a center is performing.