An investment center is an organizational unit that is accountable for generating revenues, incurring expenses, and managing investments and capital to pursue its own investment strategy. It is given responsibility for investing funds and making capital expenditure decisions. In a decentralized organization structure, investment centers allow managers to develop investment plans tailored to their operations. The key characteristics of an investment center include having control and accountability over investments and capital to maximize returns or profitability. Investment centers empower managers to find the optimal capital investments for their units through decision rights delegation. There should be multiple responsible investment centers in a multi-divisional corporation to pursue specialized investment strategies.
Investment centers have full accountability for all investment decisions
As decentralized profit centers, investment centers have control and accountability for investment decisions, unlike cost centers. The managers of investment centers are responsible for acquiring and allocating capital funds to assets and projects to try to optimize returns. For example, the head of the R&D division in a technology firm would manage their investment center by deciding funding allocation across research projects, equipment purchases, and expanding laboratories.
Investment center performance is measured by return on investment (ROI)
A key feature of an investment center is that its performance is evaluated based on return on investment (ROI). ROI measures the profitability of investments by comparing operating income generated to capital invested. So investment center managers not only choose investments but are also held accountable for the ROI outcomes. Their compensation may be directly tied to achieving ROI targets to incentivize them to maximize returns.
Capital investment authority allows flexibility to pursue growth opportunities
Investment centers differ from cost centers by having authority over capital investments rather than just costs. This capital investment autonomy lets them be proactive in committing funds to projects anticipated to drive growth and returns rather than passively monitoring budgets. For example, a regional sales office investment center could develop a product promotion strategy involving investing in more brand marketing and expanding the sales team.
In summary, the key characteristic defining an investment center is having control and accountability for capital investment decisions to try to maximize return on investment. Unlike cost centers focused narrowly on costs, investment centers take a comprehensive approach to managing revenues, expenses, assets, and investments.