Growing Profit Centers

The first decision you have to make in implementing the best system for your business is to determine what measurable profit centers exist. A key component to being able to become effective profit predictors is to organize your reporting process in a way that facilitates this.

Unfortunately, there is no “cookie-​cutter” approach to this process. However, there are some general common-sense parameters that you can apply:

1. Materiality—Don’t try to measure small endeavors unless you are poised to make them grow.
2. Allocations—Some allocations of resources will be inevitable; don’t be afraid of them, and use the best information you have available. The key is to be consistent, because if you keep changing the methodology, it will be difficult to compare periods.
3. Architecture—The design of your financial accounting system and your performance measurement systems must take into account the level of sophistication that your company is capable of and can afford, and these parameters must complement each other. Gathering statistics and data that are not used and cannot be easily related to your financial information is a waste of time. Conversely, capturing financial details that are not separately relevant is a waste of resources.

For most converters, maximizing the use of their capital assets is the key to maximizing profitability. A large subset of converters who do handwork, assembly, fulfillment, and other labor-intensive functions must maximize the use of their labor to ensure profitability. Most of you also engage in some form of “brokerage,” where you sell items that are manufactured by someone else. So, the first issue is to create a profit center for brokerage, a profit center for labor-intensive work, and a profit center for machine-intensive work. Each of these profit centers will have some directly allocable overhead, and of course, there will be pools of overhead that cannot be directly allocated. Some of these pools of overhead rise to the level of identifiable cost centers (customer service, design, accounting, etc.), and some will simply be part of larger groups of costs (selling expenses, delivery expenses, general and administrative expenses, etc.).

The key to this reporting, then, lies in the level of detail within each of these broad categories. I have shown examples in previous articles of treating each machine center as a profit center. I have also suggested using the various routings in the plant as a blueprint for profit center reporting. It may be that you have one flexo folder gluer in the plant, and almost nothing that is run on it goes anywhere else in the plant, so it makes sense to treat it as a profit center. It also may be that you have three flexo folder gluers in your plant, and you can run a large variety of orders on any one of them, depending on how busy your plant is. In that case you may want to combine those three pieces of equipment into one profit center. Many plants do a lot of point-of-purchase displays where a common machine routing is laminator, rotary die cutter, specialty folder gluer. There is no reason why that cannot be a profit center by itself as well.

There is no right answer to what the profit centers should be. However, once you decide on them, there is work to be done in the estimating system, the books of original entry, the general ledger, the financial reporting framework, and the plant data collection to make the reporting meaningful.

Mitchell Klingher is a partner of Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@klinghernadler.com.