1. What is cost center
Every organization is usually divided into parts:
- Areas: A marketing agency may have financial, commercial, human resources, etc.
- Projects: a consultancy can do management or design projects
- Services: a tourism company may have services for operators and for travel agencies
- Business Units: a company may have the parent and subsidiaries or a businesswoman may own several franchises
These parts are known as cost centers and depending on your business, it may make more sense to use one structure or another. In any case, regardless of how the company is structured, it will be necessary to understand how to make your cash flow.
In summary, cost center is a simple and convenient way of grouping your company's revenues and expenses to give you a more detailed view of areas of your business. To begin with, it's worth distinguishing between categories and cost centers.
In any cash flow you should categorize your income and expenses according to your chart of accounts, this will show you with what you have spent. For example, to Buy a Cash Flow Worksheet with Cost Center Control from LUZ, I should categorize this expense as an operating expense. Now, if I have an array and a branch office and the expense has been incurred for the array, I mark that expense as an expense of the "matrix" cost center. This tells me where the money is being spent or received.
2. When to use cost center
First it is important for you to understand that it is not because a financial functionality exists that you should use. Choosing between using cost center or it will not depend on the structure of your business and your financial maturity, after all, this will require more time and work, both filling out your financial or analysis system or spreadsheet.
So there is no right rule about cost center. You should analyze the reality and structure of your company. If you are starting, it will probably be better to use a simplified structure now if you have a company that has already opened a regional affiliate if you have more than one franchise on your control or even if you have 2 totally different deals but want to control your flow single-way cash flow can (and should) use the cost center.
3. Walkthroughs - Cost Centers
Let's imagine a case where I have a company selling books and handouts with 3 regional affiliates. One located in Rio de Janeiro, another in Porto Alegre and a third in Recife. My goal is to understand whether these affiliates are profitable or not.
The question is, where do you start?
3.1. Chart of Accounts Shared between Cost Centers
The first thing you need to understand is if all the affiliates are "exactly alike", that is, if it has the same structure. The most common answer is yes, since I will have the same suppliers, similar staff structure and sell the same products.
If this is the case, it is important that you create a chart of accounts shared between the branches. What I mean is that in the structure of your cash flow you will only have a chart of accounts. Below I show the example of the chart of accounts of expenses of our cash flow sheet with cost center.
Once you have defined your revenue and expense accounts you will arrive at the definition of your cost centers. In our case, as I already said, 3 are branches:
3.2. Registration of Revenues and Expenses by Branch
With the cost center part already created and defined, we can go to the revenue and expenses register by branch. Let's think about 4 items.
- Expenses for the payment of the benefit of an employee of the Rio de Janeiro Branch
- Genesis Book Sale at the RJ Branch
- Displacement expenditure for lecture participation in Gramado - RS
- Sale of the Palestine Book in the RS Branch
These records should look something like this:
And, if during the month you can correctly fill in your income and expense entries, you can keep a spreadsheet like this:
3.3. Statement of Cash Flow by Cost Center
In the end, the most important thing will always be the analysis of the statements within your cash flow sheet with cost centers. I believe it's important for you to have 6 different types of vision:
- General Cash Flow
- General DRE
- Accounts Payable
- General Accounts Receivable
- DRE by cost center
- Cash Flow by Cost Center
1: The following is an example:
As you can see, the 1 branch was only affected in February. Apart from this month, until July were only positive months, which indicates a good overall result, resulting in a substantial accumulated value. Now just repeat the same process for the other subsidiaries and understand if they all have positive flow or if some is causing you to lose.
3.4. Visual Analysis of Subsidiaries (Cost Centers)
Lastly, if you did a good job of financial control, there is nothing better than to do visual analysis with graphics from each of your affiliates. See the result of the 1 Branch (RJ):
As you mentioned, you can easily see that only the month of February was negative (gray line that indicates profit is only below zero in Feb). And, with a simple mouse-click, you can analyze another thread. In this case, by selecting the 2 Branch (RS), this is the result seen:
Again, you can look at the green columns (recipes) and red (expenses) or directly to gray line (profit) to assess how the financial health of that branch is specifically. Simple and practical, right ?! As every financier should be ...
I'll show you one more example to see that even though it's not gigantic, you can (and should) control more than one affiliate with cost centers.
4. Example - Hare Burguer
For those who do not know, the Hare Burguer (very briefly) is a really cool vegetarian fast food that started in the South Zone of Rio de Janeiro. For you to have an idea, this is a business like many others that started with the effort of the Rapha (founder) selling burgers on RJ's beaches alone.
The business is so cool that it has grown (Can you read some of the story here?) and now has an headquarters in the Center of RJ and another in Ipanema, in addition to participation in events. Now do you imagine figuring how much each store makes and spends without having a cost center for matrix and affiliate? It would be complicated as hell, given that both receive inputs and transfer food between them.
Let's do a fictional (and very simplified) case study of the Hareburger accounts for the parent and subsidiary. Assuming the following numbers:
- Hareburguer - Cost R $ 4 and Sell Price R $ 8
- Mini Hare (Burger) - Cost R $ 2 and Sell Price R $ 5
- Costs Matrix - R $ 15.000
- Subsidiary Costs - R $ 10.000
- Sales Matrix - 4.000 Hareburgueres and 5.000 Hamburguinhos
- Sales Branch - 1.500 Hareburgueres and 2.000 Hamburguinhos
Let's do the math:
- 1 Cost Center - Matrix
- Recipes = (4.000 x 8) + (5.000 x 5) = 32.000 + 25.000 = 57.000
- Direct Expenses = (4.000 x 4) + (5.000 x 3) = 16.000 + 15.000 = 31.000
- Contribution Margin = 57.000 - 31.000 = 26.000
- Fixed Costs = 15.000
- Profit = 26.000 - 15.000 = 11.000
- 2 Cost Center - Branch
- Recipes = (1.500 x 8) + (2.000 x 5) = 12.000 + 10.000 = 22.000
- Direct Expenses = (1.500 x 4) + (2.000 x 3) = 6.000 + 6.000 = 12.000
- Contribution Margin = 22.000 - 12.000 = 10.000
- Fixed Costs = 10.000
- Profit = 10.000 - 10.000 = 0
If we were to analyze a general result of Hare Burger (remembering that these numbers are hypothetical), we would see that the profit of the company was R $ 11.000, but as we have just analyzed, we know that this is not everything. It is essential to understand whether all cost centers are positive or not.
In this case, we realize that all profit comes from the parent company and that the affiliate only "ties" revenues and expenses. From the analysis can come good ideas on how to make affiliate sales increase and so on. The important thing is to understand the reasons for the result and work on it.
What is still missing?
A good financial projection in your cash flow per cost center can help you understand the goals you had and what you actually accomplished. Try setting up a plan with the amount you would like to have for each branch.
Track the results and see if they are above or below what is planned. If you are worse try to understand why and make action plans to improve.