About Business Units

You will probably go broke if all your income is pooled. People tend to have good reasons to need more money than they put in.

If you are in an existing organization or your business has grown, you need to think in terms of business units.

Modern business tend to divide up their operations into business units. These can be departments, branches, projects, regions, or product lines. If the project is large, you might need to divide it up into its own set of accounts. Business units aren't separately incorporated.

Each business unit has its own, separate income and expenditures, and when they trade with each other, they are known as "internal customers."

Sometimes you might want to classify them as:

• Cost units: units that will normally cost money and have no way of generating income.
• Profit units: units that will normally generate profits and will be closed down if they never generate income
• Cost-neutral units: units that will normally recover all their own costs but not necessarily generate income.

For example, we split our language school into separate departments.

• One department made most of the money and some barely survived. But at least we knew how well each was doing, and the people who made most of the money could decide how much they'd give to prop up the others.
• Our admin section once had no way of earning its own income, so each department regularly put money into admin. By doing that, we knew how much our admin cost and how it was paid for. The admin section now charges its own fees so its funds are separately accounted from the time student fees come. In other words, what was a cost unit is now a neutral unit.

Splitting a business into business units helps you to find out more easily how much money each unit makes or costs, to more easily figure out why, and totake control of them. As your organization grows, you can generate more accounts so you can keep track of funds.

Managers can also make other more effective business decisions, for example:

1. It can't hide if it's losing money, and managers can more readily intervene.
2. If a unit is doing really well, you can give commensurate rewards.
3. Some units need to be closed down or restructured.
4. All units might share some overheads, so you might make those overheads a separate account. That way, you can control how much flows into them.
5. You could also decide to transfer funds from one unit to another, and monitor how much and exactly why.
6. You might accept losses in some units if your have good reason. (It might still be in start-up mode, or you might want longer-term market share rather than short-term profit.)
7. You can more easily see when it is better to outsource to another company than to provide a service in-house.
8. You might find it advantageous to separately incorporate some business units.
9. The business might own multiple links in the supply line. That is, it own more than one component: the raw materials provider, the transport, the component manufacturer, the producer that assembles the components, the distributor, and the sales agency. If they can do this, they can choose which business units will make a profit and which only need to break even or lose. That way, they can maximize their tax advantages and their market position.