In financial reporting, a segment is a part of the business that has separate financial information and a separate management strategy. Segments may be geographic, line of business or departmental. Public companies are required to report by segment in the notes of financial statements. Management accounting often reviews the company by segment to determine which areas or lines are working better than others.
Segmented accounting divides a company's financial performance into pieces. A company can be segmented in many ways, including physical location, products or areas of responsibility. Comparing segments of a business helps a company analyze company performance more accurately. Generally accepted accounting principles in the United States require large segments to be reported in the financial statements of public companies so investors can also assess the business more accurately.
This is the most common type of segmentation. A business may operate in many geographic markets. For example, a retail business may have stores in all four quarters of the country. In that case, it is useful to compare how profitable the stores in the southeast are in comparison to the stores in the northwest. This can reveal the underlying components of profitability and also may uncover any chronic problems in certain locations. Geographic segments can be anything from areas of a single city to various countries throughout the world.
Line of Business
A business can be segmented by the various products or services it sells. A toy manufacturer, for example, may want to compare the operations of its infant toys to its middle-school educational aids, or it may want to look at how one board game is selling compared to another. In an insurance company, it makes sense to separate the life business from the health business for reporting purposes. Analyzing individual lines of business can show which products or services are underperforming so they can be revamped or replaced.
Some companies want to analyze the performance of each department. This is often done for internal purposes rather than outside financial reporting. Comparing the expenses of each department or looking at the employee turnover by department can give a company an idea of how efficient and effective each one is. If one department has chronic turnover, for example, it may mean that the manager of the department needs more training or should be replaced. Comparing departments can uncover unnecessary expenses and can lead to cost savings.
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