What is the cost center and why is it essential for SMEs?

Millions of companies are born every day all over the world. And every day a few more die as well. The main reason? Poor management of resources. Most small and medium-sized businesses don't survive because they simply don't know where their money is going. That's why knowing where your business spends its money can give you better control over its future. Knowing what the cost center is is essential for you to have a better management.

However, we know that managing the costs and revenues of a business is a real challenge. To survive, small and medium-sized businesses must sell enough products or services, collect profits and manage their costs. The latter can be more difficult than it sounds, especially when you don't have a good breakdown of costs.

Without cost control, any business can quickly get out of control, and one way to do this is to use a cost center in the accounting system, a strategic accounting tool used to set budgets, monitor projects, control expenses and evaluate performance in all areas.

A cost center is the best way to put your eye on the magnifying glass and keep a close eye on your company's money, increase the chances of growth and minimize financial risks.

In this post we explain what a cost center is and why it is essential for small and medium-sized companies.

What is the cost center?

The definition of a cost center in a small or medium-sized company is a section or business unit for which you can identify the costs for which someone is responsible. Typically, a cost center has a budget that includes all costs that can be traced back to the cost center. These costs can range from salaries, insurance costs, office supplies, phone calls, computers to fuel expenses.

In small or medium-sized businesses there are usually one or two cost centers. There is no need to break things down into smaller cost centers because costs can be more easily monitored with budgeted figures. However, larger companies usually need a much more comprehensive breakdown to control the costs of each cost center and the business as a whole.

Another important point is that cost centers are usually divided into main cost centers and auxiliary cost centers. The former are characterized by being those that intervene directly in manufacturing and the latter are characterized by being indirect costs that can be distributed consecutively among the main centers and then distributed among the products.

Some examples of cost centers for SMEs may be:
  • Administrative cost center (CCA): these are the costs associated with the control and general management of the company.
  • Service cost center (SCC): these are the costs of all those departments that provide support to other cost centers such as warehouses, maintenance or medical services, so that their activities can be carried out efficiently.
  • Production cost center (PCC): these are those departments or areas in charge of transforming raw materials, such as processing plants, labeling, packaging, etc.
  • Sales cost center (SCC): these are the departments in charge of marketing the finished products.
10 key points to understand how a cost center works for SMEs:
  • It is a tool used to identify the company's costs and tracks them individually.
  • Cost centers for medium-sized companies generate costs for the organization but also indirectly add profit. Some departments of cost centers can be: purchasing, administration, production or sales.
  • A cost center is the part of the business that generates costs without profit.
  • A department that has a manager and a budget is a cost center.
  • Cost centers help to plan future costs in order to have a basis for comparison with actual costs. With this data, SMEs can project their future expenses.
  • All cost centers should appear somewhere in the control area.
  • A cost center can be planned or budgeted.
  • A cost center has a purely strategic function, with this data leaders can have better control and make better decisions.
  • A cost center needs the support of cost accounting to facilitate the classification of the different expenses required.
  • The cost center allows to know the value of direct materials, the value of direct labor and the indirect manufacturing cost.
Why is it important for your small or medium business to have cost centers?

Cost centers are important for small and medium-sized companies for many reasons. First of all, they are a strategic tool capable of presenting the results of operational performance. When cost centers are in place, leaders can easily identify the strengths and weaknesses of each area of the company, and then make better decisions.

Cost centers are also an ideal tool for planning and controlling business revenues and expenses. If a leader has a doubt as to where a part of the business budget has gone, it is enough to look at the cost center data to find out.

Finally, having cost centers makes it possible to analyze the different variances that departments have with respect to their performance. Managers or business leaders can compare the objectives set with what has been achieved and correct processes in order to improve results every day.

ERP software can help you to know with a click the profitability of each cost center or area of your company. At Corponet we offer you our ERP consulting service, with more than 15 years of experience focused specifically on SAP Business One and growing companies, we can affirm that we are the ideal candidate to support you in this important process and help you reach the profitability levels you have always been looking for.

We offer advice based on updated knowledge, new practices and tools, and technological coaching to carry out your growth and continuous improvement projects. For us, deep long-term relationships are one of the values that we promote to have synergy with our business partners.

We also invite you to know SAP Business One, the ERP for growing companies that offers everything you are looking for to achieve your business goals and increase the profitability of your company through the integration of information and process optimization.

Interested in learning more? Request a SAP Business One Demo. It is totally free and is the best opportunity to observe this ERP software operating live and with business scenarios similar to those of your company. Also, you will be able to solve your doubts with the help of a specialized consultant.