What it means
The legal point is the one that matters most. A branch is part of the parent company, so the parent is fully liable for everything the branch does, whereas a subsidiary is a separate legal entity with its own liability and its own accounts.
For management purposes, though, branches are usually treated as separate units. Each has a profit and loss account, its own targets and often its own manager with authority over local hiring, pricing within limits, and day to day spending.
Measuring a branch fairly is harder than it looks. Head office costs such as finance, IT and marketing have to be allocated somehow, and a branch judged on profit after a large and arbitrary allocation may look like a failure when it is generating good contribution.
Overseas branches introduce tax complexity that catches many companies out. A branch abroad often creates a permanent establishment, meaning the local authority can tax the profit earned there even though no separate company exists, which is one of the main reasons firms choose subsidiaries instead.
Branch networks also carry a control burden. Cash handling, stock, local purchasing and discount authority all sit further from head office, so branch level reconciliation, spending limits and periodic audit visits are standard practice rather than excessive caution.
In practice
Real-world examples
Example 1
An accountancy firm opens a branch in a neighbouring city with three staff and a shared client management system. It trades under the same partnership, so the partners remain liable for the branch's work.
Example 2
A bank closes eleven branches after transaction volumes fall below the level that covers premises and staffing. It keeps four regional branches for the commercial lending relationships that still need face to face contact.
Example 3
An engineering group opens a branch in a foreign market to service installed equipment, and finds the local authority treats it as a permanent establishment. It converts the branch into a subsidiary the following year to ring fence the liability.
Think of it
A branch office is like a tree branch. It grows outward to reach more sunlight, but it is not a separate tree. It shares the same roots and trunk as the main business, drawing its life support and structure from the headquarters.
Formula
Calculation
Branch contribution = branch revenue - branch direct costs
Branch profit = branch contribution - allocated head office costs
Branch margin = branch profit / branch revenue
A building supplies company runs a branch generating annual revenue of $1,800,000. Direct costs, meaning cost of goods sold, branch salaries, rent, vehicles and local marketing, come to $1,320,000.
Branch contribution = $1,800,000 - $1,320,000 = $480,000.
Head office allocates $200,000 of central costs to the branch, based on its share of group revenue. Branch profit = $480,000 - $200,000 = $280,000, and branch margin = $280,000 / $1,800,000 = 15.6%.
The distinction matters for decisions. If the branch were closed, the $480,000 of contribution would disappear but most of the $200,000 of head office cost would not, so the group would be roughly $480,000 worse off rather than better off by any amount.Case study
Seen in the real world
The following is a fictional and illustrative example. Halverton Trade Supplies, an invented plumbing merchant, ran seven branches and judged each on profit after a head office charge allocated evenly, meaning every branch carried $200,000 regardless of size. The smallest branch, with revenue of $1,100,000, showed a loss of about $40,000 and was recommended for closure.
The fictional finance director recalculated on contribution instead. That branch had direct costs of $860,000, so it was contributing $240,000 a year before any allocation, and closing it would have removed $240,000 of profit while eliminating perhaps $30,000 of genuinely avoidable central cost. The group would have been around $210,000 a year worse off.
Halverton changed both the allocation method and the measure. Central costs were allocated in proportion to revenue rather than evenly, branches were managed on contribution and contribution margin, and the smallest branch was kept and given a delivery van shared with a neighbouring site. Two years later it was the second most profitable branch per pound of revenue in the group.
Watch out
Common mistakes
- Assuming a branch limits the parent's liability, when the parent company is legally responsible for everything a branch does.
- Closing branches on the basis of allocated profit rather than contribution, which destroys value when most central costs are unavoidable.
- Opening a branch overseas without checking whether it creates a taxable presence in that country.
Questions
People also ask
What is the difference between a branch and a subsidiary?
A branch is part of the same legal entity as the parent, while a subsidiary is a separate company with its own accounts, its own liability and its own shares.
How should head office costs be allocated to branches?
Use a driver that reflects genuine consumption, such as revenue, headcount or transaction volume, and be consistent so branch results can be compared over time.
Does a branch file its own accounts?
Not domestically, since its results are consolidated into the parent's financial statements, though an overseas branch may have local filing and tax obligations.