Cost centre

Definition: What is a cost centre?

In accounting, cost centres are used to determine where in your business costs occur.

Technically, cost centres are the departments or functions in your business which don’t directly bring profit but are nonetheless necessary. An example of a classic cost centre might be human resources or the IT department.

In your accounting tools (and in Spendesk), your “cost centers” are often the allocations of costs across all business units. By seeing how much each department spends, you can quickly assess whether certain business units require more investment, and whether others are outspending their impact.

Cost centre vs profit centre

As the name suggests, profit centres are the aspects of your business that directly bring revenue. Clear examples include clearly differentiated product lines - clothing versus shoes in a retail business, for example; the bar versus the kitchen in a restaurant; software versus hardware in an IT business. By accounting for these profit centres separately, you can easily which is most profitable for your company.

In many companies, profit centres line up with departments - just like cost centres often do. These might include Sales, Marketing, and Product Development. But as is also the case with cost centres, you might prefer to account for profit centres more precisely, based on specific product lines or sales strategies.

General ledger accounts

While cost centres record where spending occurs (or who spends), general ledger accounts detail what you’re spending on. These GL codes (also known as expense categories) could be for things like business travel, software licences, or office supplies.

Combining cost centres and GL accounts is both fundamental bookkeeping practice, and enables successful management accounting. With cost centres, you know which departments cost you the most, and can see the evolution in these costs over time. With GL accounts, you can see which categories of expenses occupy most company cash.

Used together, you can investigate the following kinds of questions:

• Our Sales team travels a lot, which is normal. But should our HR department spend as much on travel as it does?

• The Design department has spent much more on software subscriptions this year than normal. Are we sure there aren’t any duplicates or redundancies here?

• The Marketing team reduced its social media ad spend by 20% this quarter. Did our customer acquisition drop as a result?

Examples of cost centres

As noted above, the classic example of a cost centre is a department that doesn’t directly generate profit. These include:

• Human resources

• IT

• Research & development departments

• Office maintenance

• Product or production cost centres (particularly to produce physical goods)

• Customer service sometimes (but not Customer Success)

• Other service departments

But as we’ll see next, cost centres are often used in accounting software and spend management tools for all departments, whether they qualify more as a profit or loss.

And while department is the most common, you could also choose to define cost centres along other lines, including:

• Geography, with a different centre for each office location or market you serve

• Job function, which isn’t always determined by department

• Team or squad within a department

• Activity, regardless of the department (you could also use GL codes for this)

How Spendesk helps manage cost centres

Cost accounting is theoretically pretty simple, but can be more challenging in practice. When a transaction occurs, the accounting department needs to allocate that spend to the right department or function. And when you have hundreds or thousands of payments made all over the company, that task can be time consuming and painful.

Spendesk lets team members set the correct cost centre at the time of payment, whether they pay by card, invoice, or expense claim. And the default cost centre is based on the department they belong to, so in most cases they don’t need to change anything.

Here’s how it works in practice, with an example from the IT department:

• An IT manager needs to pay an invoice for a new software. Hopefully they’ve first created a purchase order, which lets you plan your IT budget and pre-approve costs where appropriate.

• They upload the invoice to Spendesk, which reads the details and identifies the supplier, amount, issue date and due date.

• Because they’re in the IT team, the cost centre is automatically suggested as “IT Department” (or whichever name you’ve chosen). If they’re submitting it on behalf of another team, they can change the cost centre to reflect this.

• They also choose the GL account (called “expense category” in Spendesk). In this case, that might be “Software licences.”

• They submit the invoice to be approved by the budget owner for that cost centre (perhaps the Head of IT or their finance business partner).

• Once approved, it can be paid by the finance team.

All of the above is customisable for your business. To keep things simple, you might only have one cost centre per department. For more detailed financial accounting, you could create one for every sub-team within each department.

And the same for expense categories - you can have as many as makes sense for your business and the team members who spend.

Who can create a new cost centre?

In Spendesk, this is for you to determine. Typically the finance team (most notably the financial controller or CFO) owns the account and create new centres and expense categories.

In practice, it’s best to do this in collaboration with your teams. Find out what the most common costs are, and whether there’s a clear need to sub-divide beyond the department level. This also depends on who should approve which costs.

For example, you could choose to separate the functions with your marketing team:

• Product marketing

• Content and brand marketing

• Design

• Performance marketing and paid acquisition

You can choose to have all costs approved by the overall Head of Marketing or CMO, or to have each team lead manage their own budget. But this cost centre definition gives you a more precise idea of how the department spends, and which investments have the most impact.