Cost Centre Analysis for Growing Businesses
Updated:
January 16, 2025
12 minutes
What is a Cost Centre?
A cost centre is a department or function within a business that incurs costs but does not directly generate revenue. Common cost centres in an eCommerce business include:
• Marketing: This includes all of the costs associated with acquiring new customers, such as advertising, content creation, and social media.
• Operations: This includes all of the costs associated with fulfilling orders, such as warehousing, shipping, and customer service.
• Technology: This includes all of the costs associated with your eCommerce platform, your software subscriptions, and your IT infrastructure.
• General and Administrative (G&A): This includes all of the other costs of running your business, such as rent, utilities, and salaries for non-revenue-generating employees.
The Benefits of Cost Centre Analysis
Cost centre analysis can provide a number of significant benefits for a scaling eCommerce business:
• Improved Cost Visibility: By breaking down your costs by cost centre, you can get a much clearer picture of where your money is going. This can help you to identify areas of overspending and to make more informed decisions about where to allocate your resources.
• Increased Accountability: When you assign costs to specific cost centres, you can hold the managers of those cost centres accountable for their spending. This can help to create a culture of cost-consciousness throughout your organisation.
• Enhanced Budgeting and Forecasting: Cost centre analysis can provide you with the data you need to create more accurate budgets and forecasts. This can help you to better plan for the future and to avoid any nasty surprises.
• Improved Profitability: By identifying and eliminating wasteful spending, cost centre analysis can have a direct and positive impact on your bottom line.
Conducting a Cost Centre Analysis
Now that you understand the benefits of cost centre analysis, let's take a closer look at the steps involved in conducting an analysis.
Identify Your Cost Centres
The first step is to identify the different cost centres within your business. The specific cost centres you choose will depend on the size and complexity of your business, but the common cost centres listed above are a good starting point.
Allocate Your Costs
The next step is to allocate your costs to the appropriate cost centres. This will require you to go through your financial statements and to assign each expense to a specific cost centre. Some costs, such as the salaries of your marketing team, will be easy to allocate. Other costs, such as rent and utilities, will need to be allocated based on a reasonable methodology, such as headcount or square footage.
Analyze Your Spending
Once you have allocated your costs, you can begin to analyze your spending. For each cost centre, you should look at:
• The total cost: How much are you spending in this cost centre?
• The trend over time: Is the cost of this cost centre increasing or decreasing over time?
• The cost as a percentage of revenue: How does the cost of this cost centre compare to your total revenue?
• The key drivers of cost: What are the key factors that are driving the cost of this cost centre?
Benchmark Your Spending
To get a better sense of how your spending compares to other businesses, you should benchmark your spending against industry averages. This can help you to identify areas where you may be overspending.
Identify Opportunities for Savings
Based on your analysis, you should be able to identify a number of opportunities for savings. These could include everything from renegotiating with your suppliers to implementing more efficient processes.
Using Cost Centre Analysis to Drive Profitability
Cost centre analysis is not just an academic exercise. It is a powerful tool that you can use to drive profitability in your business. Here are a few ways to use cost centre analysis to make a real impact:
• Set budgets for each cost centre: Once you have a clear understanding of your costs, you can set budgets for each cost centre. This will help you to control your spending and to ensure that you are on track to meet your profitability goals.
• Incentivize cost savings: You can incentivize your cost centre managers to save money by offering them a bonus for coming in under budget.
• Continuously monitor your spending: You should continuously monitor your spending against your budget and you should be prepared to take action if you start to go off track.
Conclusion
Cost centre analysis is a critical tool for any scaling eCommerce brand. By identifying and analyzing your cost centres, you can gain a deeper understanding of your business, identify opportunities for savings, and drive long-term profitability.
