How do you measure and improve the return on investment (ROI) of your responsibility center?

2 How to measure ROI for cost centers?

A cost center is a responsibility center that only incurs costs, but does not generate revenues. Examples are the accounting department, the human resources department, or the IT department. The ROI for a cost center is usually measured by comparing the actual costs with the budgeted or standard costs, and calculating the variance. The variance can be favorable or unfavorable, depending on whether the actual costs are lower or higher than the budgeted or standard costs. The manager of a cost center can improve the ROI by reducing the costs or increasing the efficiency of the operations.

3 How to measure ROI for revenue centers?

A revenue center is a responsibility center that only generates revenues, but does not incur costs. Examples are the sales department, the marketing department, or the customer service department. The ROI for a revenue center is usually measured by comparing the actual revenues with the budgeted or forecasted revenues, and calculating the variance. The variance can be favorable or unfavorable, depending on whether the actual revenues are higher or lower than the budgeted or forecasted revenues. The manager of a revenue center can improve the ROI by increasing the revenues or enhancing the effectiveness of the activities.

4 How to measure ROI for profit centers?

A profit center is a responsibility center that generates both revenues and costs, and is responsible for its own profit or loss. Examples are the product lines, the divisions, or the subsidiaries of an organization. The ROI for a profit center is usually measured by dividing the profit by the invested capital, and multiplying by 100%. The profit can be calculated by subtracting the costs from the revenues, and the invested capital can be calculated by adding the fixed assets and the working capital. The manager of a profit center can improve the ROI by increasing the profit margin or reducing the capital intensity.

6 How to use ROI analysis for decision making?

ROI analysis is a useful tool for comparing and evaluating different alternatives or projects, based on their expected profitability and efficiency. ROI analysis can help managers to answer questions such as: Which responsibility center is performing better? Which product line or division should be expanded or discontinued? Which investment opportunity should be accepted or rejected? Which marketing strategy or campaign should be implemented or modified? To use ROI analysis for decision making, managers need to estimate the costs, revenues, and capital involved in each alternative or project, and calculate the ROI for each option. Then, they need to compare the ROI values and select the one that maximizes the ROI, or exceeds a certain target or benchmark.