For example, a department store may consider each of the departments within the store to be an entry center, such as men's shoes, women's shoes, men's clothing, women's clothing, jewelry, accessories, etc.
A revenue center is one of the five divisions of a responsibility center: cost center, revenue center, profit center, contribution center, and investment center. A revenue center is rated solely on its ability to generate sales; you are not judged by the amount of costs you incur.
These centers are used in organizations that focus primarily on sales. They only measure income; therefore, they are marketing establishments that are exempt from the generation of profits and their responsibility.
Characteristics of Income Centers
The performance of a revenue center is measured by comparing actual to projected sales (as well as the amount of revenue per timeline). The comparison of the sales quotas with the budgeted ones is also used as a performance indicator.
To control their management, the revenue centers should focus on analyzing the revenue from sales, broken down by markets, customers and products, as well as setting the cost structure of the center.
The criteria for the separation of revenue centers can be: geographic region, product or product group, customer or customer group, industry or market segment.
The size of the revenue centers, measured by the size of their staff, should be determined taking into account the workload required to support the anticipated number of clients.
Managerial responsibility
In a revenue center, the manager usually has control over matters related to marketing and sales. This is delegated to you because both spheres require extensive explicit knowledge for the local market.
The manager in the revenue center is primarily responsible for the revenue level of the business; that is why you can set prices.
The management team is responsible for selling the goods or services that the company produces at a specific cost. The team sets a sales price based on production costs plus a profit margin.
Your goal is to meet or exceed revenue targets while maintaining agreed-upon profit margins.
Use of technology
Technological advancements can reduce expenses in revenue centers, as well as provide non-traditional (online) revenue centers to non-retail companies in the manufacturing or service industries.
This can be done by creating websites that directly offer the supplier's products. This reduces costs by shortening the distribution channel, eliminating wholesalers and retailers.
Center expenses
The income center has expenses. For the manager of a revenue center this is of minor importance, as revenue is his only performance indicator.
However, not all costs are ignored in a revenue center. For example, the manager of the same is responsible for the expenses of his department.
In an income center, living expenses can be rent, wages, taxes, and security. However, costs related to the sale and manufacture of the product are not included in these expenses.
Advantage
The revenue center is usually the entity that sells the products manufactured by other units. Your task is to maximize revenue and increase market share under conditions of strong competition.
They are generally created in organizations that seek to increase their market share by strongly driving sales. In the event of a slowdown in the industry, your goal is to maintain the level of turnover.
The revenue center is often looked down upon, or treated only as an introduction to discussing the profit center, when in fact the revenue center is responsible for obtaining the revenue and the cost of its business acquisition financing.
To some extent, the costs that are related to the activities of the revenue center act as a secondary factor but, ultimately, the difference in revenue and costs to sell is what gives the margins, through which the existence of a company is ensured.
Disadvantages
One of the biggest problems in an income center is that almost all expenses are ignored. If expenses are not monitored by another division of the business, profits can be obstructed.
The initial cost of opening the revenue centers is high, and it is very likely that it will take a long time for these centers to be profitable and cover start-up costs.
It is easy to calculate the performance of a revenue center, since revenue is the only variable against which it is measured. However, this means that performance evaluations are also limited to one variable, which is not enough to see the performance of a business division.
Managerial problems
One risk in considering only revenue center sales performance is that the manager may not be prudent in spending the funds, or take unnecessary risks in order to generate those sales.
For example, the manager might start selling to poor quality customers in order to generate sales. This increases the risk of loss due to bad debts.
In addition, the manager of a revenue center does not have the vision required to make marketing decisions, so that responsibility cannot be given.
For example, if a manager is allowed to set the revenue goal, he will maximize his revenue up to that point. This causes the marginal revenue to become zero.
In large companies with multiple products, the revenue centers will be responsible for meeting the revenue target for each product. The problem arises if a general total of income is requested, adding the income of all the products.
The revenue center manager will then be able to make up for any loss in product revenue by taking the surplus from those who exceeded targets, compensating those who underperformed, distorting the overall profit.
