Project management is a set of principles or techniques to manage a single business activity. Multiple projects can fall under a company’s project management system. In many cases, companies will set up projects as cost centers, revenue center or profit centers. Each one has specific rules for operating, especially in terms of cash flow. Cash-flow management is slightly different among each of these centers.
A cost center is a project that does not earn revenue. All activities result in expenditures of a company’s capital reserves. Cash-flow management for these centers involves meeting budget guidelines. Owners and managers often limit cash expenditures to ensure each project does not use too much cash. Each accounting period, accountants will review the actual expenditures to the budget, measuring the effectiveness of the center’s cash flows.
Revenue centers are those projects that generate cash for a business. For example, a hotel may start a project that involves offering room service to guests. The project will eventually make money as guests purchase meals through the service. Cash-flow management in this project format tracks how much money the revenue center brings in. Keeping the information separate from normal business activities allows accountants to measure each project on its own merits.
Profit center projects can be a combination of the first two project types. Companies set these project centers up because they control both revenues and costs. In some cases, a company may set specific percentages for its profit centers. This provides a target in terms of cash flow. Owners and managers expect the revenue center to generate enough cash flows to cover cash outflows and provide extra to reinvest into the business.
Accountants often prepare cash-flow reports for all cost, revenue and profit centers. Each center will then have the individual reports rolled into one aggregate statement of cash flows. Individual cash flow statements are for managerial review. The aggregate statement of cash flows is typically for external business stakeholders. A historical trend is possible when comparing these statements.