Investment center is a segment of an organization given the responsibility for its own revenues, costs and capital investments. It is therefore responsible for the overall results of the segment and is evaluated on the basis of returns generated from capital employed.
In terms of responsibility and accountability, investments centers are at the highest level, as they have more responsibility compared to profit centers and cost centers. Manager of an investment center is likely to be an experienced professional who has far more responsibility than a manager of a cost center or a profit center. The organization provides capital to investment center and gives it the authority to make policies related to revenues and costs. In addition, an investment center may also decide on the capital investments, for e.g., purchase of a plant or machinery, an office building etc. An investment center has the responsibility to utilize the resources efficiently to generate maximum returns for the organization.
Higher management of an organization keeps a keen eye on the performance of investment centers. Performance is evaluated by comparing the profits earned relative to the resources they had. Return on capital employed (ROCE) or return on investment (ROI) is usually calculated to evaluate the performance of an investment center.
This helps the higher management in making key-decisions on timely basis, such as:
- Any structural changes needed to improve any low performing division.
- Whether to discontinue any business segment whose return on capital employed is continuously falling.
- Whether any additional resources are needed at any investment center to lift the performance.
- Whether to provide further resources to an investment center showing signs of growth etc.
Examples of investment centers
- A product line having independent infrastructure, earning revenues and costs independently, for example, an automobile company having 3 divisions having separate manufacturing facilities dealing in motor bikes, cars and trucks.
- A regional office of an organization having different regional offices in a country.
- A country office of a multinational business.
- A subsidiary company in a group of companies.