Revenue Centers

Learning Outcomes

  • Identify revenue centers

A revenue center is a distinct operating unit of a business that is responsible for generating sales and is judged solely on its ability to generate sales; it is not judged on the amount of costs incurred. Revenue centers are employed in heavily sales-focused organizations. For example, the sales department of an auto dealership or a furniture store would be a revenue center. On the other hand, the service department at the auto dealership is most likely a profit center, judged on the bottom line. If the service department consistently lost money, management might decide to discontinue that service, unless it was determined that getting rid of the service department would hurt sales more than it would save in net expenses. This is an example of where a differential analysis would come in handy.

From the profit center examples, a hospital might have the following responsibility centers:

  • Inpatient care
  • Housekeeping
  • Pediatrics
  • Neonatal
  • Home Care
  • Gift Shop
  • Administration

Admin and housekeeping would be cost centers, while the pediatric unit, neonatal, home care, inpatient care, and gift shop would be profit centers. Do you think a hospital might have a revenue center? It’s possible that even a not-for-profit hospital could classify the billing department as a revenue center, not holding the manager of that department accountable for staffing and other costs, or having a separate budget for those costs. It could, in fact, be two responsibility centers: a cost center (mostly staffing) and a revenue center (billings). You might imagine a manager being held responsible not only for billings, but also for amounts actually collected.

The classic example of a pure revenue center, where the budget manager would not be accountable for costs, is a sales department. Even so, most sales managers are probably also responsible for some costs. In fact, a sales manager might be held accountable not only for gross sales, but for net sales (gross sales less discounts, returns, and allowances) and gross profit (net sales minus cost of goods sold). Often, sales commissions are based on the margin (gross profit) and not on gross sales, and management bonuses might also be based on the margin.

A risk in using revenue centers to judge performance is that a revenue center manager, and especially employees, may not see the bigger picture. For instance, fees are a critical part of the profit model for banks in the U.S., and Wells Fargo incentivized “cross-selling” in order to increase revenue. Bank employees received bonuses (or had to meet quotas) based on the number of new accounts opened. This resulted in widespread fraud and ultimately cost the company $185 million in settlements with regulators because employees of the bank had created about 1.5 million fictitious bank accounts and 565,000 fraudulent credit card applications.

For another example of revenue centers watch this brief review:

You can view the transcript for “Revenue Center” here (opens in new window).

Now, check your understanding of revenue centers.

Practice Question

Now that you have a better understanding of what a revenue center is, try your hand at this activity.