What is a Revenue Center?

A revenue center is a distinct operating unit of a business that is responsible for generating sales. For example, a department store may consider each department within the store to be a revenue center, such as men's shoes, women' shoes, men's clothes, women's clothes, jewelry, and so forth. A revenue center is judged solely on its ability to generate sales; it is not judged on the amount of costs incurred. Revenue centers are employed in organizations that are heavily sales focused.

Example of a Revenue Center

A national retail chain, Chestnut Stores, operates various departments, including clothing, electronics, and home goods. The electronics department in a specific store location is considered a revenue center. Its primary responsibility is to maximize sales revenue from products like TVs, laptops, and smartphones. The characteristics of this revenue center are as follows:

Focus on revenue generation. The department manager is evaluated based on the total sales achieved (e.g., monthly or quarterly revenue targets).
No responsibility for costs or profits. While the department incurs expenses (e.g., staff salaries, inventory costs, and utilities), these are managed at the store or corporate level. The electronics department itself is judged purely on its ability to generate revenue.
Performance metrics. Metrics used to evaluate the department include total revenue generated, the percentage of sales growth as compared to the previous period, and the average transaction value.

In its most recent month, the electronics department had a monthly sales target of $100,000, and achieved actual sales of $120,000, resulting in revenue growth compared to the budget of 20%. In this case, the department exceeded its revenue target and would be considered successful as a revenue center.

Advantages of Revenue Centers

The key advantage of a revenue center is that it clarifies the primary goal of the entity - which is to increase sales. With such a singular focus, the parties responsible for a revenue center can direct their energies entirely towards driving up sales, without needing to be overly involved in monitoring expenses or invested funds.

Disadvantages of Revenue Centers

A risk in using revenue centers to judge performance is that a revenue center manager may not be prudent in expending funds or incurring risks in order to generate those sales. For example, a manager could begin selling to lower-quality customers in order to generate sales, which increases the risk of bad debt losses. Consequently, the use of revenue centers should be restricted. A better alternative is the profit center, where managers are judged on both their revenues and expenses.