An In other words, it’s a different way

An investment centre, 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 centres and profit centres, management often looks at departments as
investment centres. In other words, it’s a different way of looking at and
evaluating how divisions and departments perform.

Profit and cost centres typically focus on the
amount of profits they contribute to the company. Profit centres 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 centres,
like the marketing and human resource departments, do NOT directly contribute
to the company’s profits. This is the traditional way of looking at departments.
They either generate profits, or they contribute costs.

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The investment centre philosophy uses a
different approach to analysing 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 centre also can use capital and funding to purchase other assets to
increase revenues.

In short, managers analyse investment centres
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 centre, 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 centres
will either be shut down or have their capital amounts reduce.

Management typically uses financial
ratios like the return
on investment ratio and the economic value added calculation
to evaluate how well a centre is performing