How to Use Profit Centers

Once all the income and expenses are properly allocated to the various Profit Centers, the fun can begin. Management can run reports to determine the profitability of each business segment. A quick review of the results will indicate whether that new program the agency has been working hard on is paying off. For example, is personal lines just an accommodation, or is it a moneymaking department?

In some cases, the information will confirm a gut feel. But don’t be surprised if the numbers contradict intuitive expectations. Management can now get clear answers to questions posed in “what if” scenarios.

How useful is it to know the answers to the following questions: Was the direct mail program for the personal lines department profitable? Are the perquisites paid to the commercial lines producers cost effective? Is the staffing for the service department adequate? What is the spread for each department? (Spread is revenue per employee minus average compensation costs per employee). How would it affect the bottom line if the firm added a producer paid on a commission basis who brought in $75,000 in commission revenue the first year? Should the agency purchase a book of business?

Analyzing a single set of Profit Center financials might not answer all of these questions, but the use of Profit Center accounting will broaden the vision of what questions need to be asked and where the answers might reside. Asking the right questions and then getting answers is a fundamental part of management. A good understanding of income flow, cost structure and the profit potential within a business is critical to establishing and implementing effective strategies. One cannot know which direction is forward, unless the direction of the path already covered is known.