What is a Business Segment?

A business segment is an independent unit within a business that brings in its own revenue and keeps its own books to track profits, losses, and expenses. Business segments are still part of the main company and retain accountability to company officials. They provide a way for companies to track performance in different areas of the market. In business segment reporting, companies distribute information about their performance broken down by segment to allow people to see where the areas of greatest profit and loss lie.

A business offering a single product or service does not need segments, but larger companies with a multitude of offerings do. A manufacturer of heavy equipment might have a business segment for farming equipment, one for factory equipment, another for parts, and another for service. Income from each segment goes directly to it, not through the company, and the business segments can independently track their own performance and report back to the company on areas of strength and weakness.

When a business segment performs well, the company can invest in expanding and supporting it, on the grounds that it is a valuable and useful part of the business. When it starts to perform poorly, the business can discuss reorganization or possible closure of that segment. Another option is to split it off and sell it to another company that might be able to manage it more effectively.

In an annual report, business segment reporting gives investors a detailed view of company performance. While overall information about assets, liabilities, and revenue is useful, drilling down to individual components is more informative. This can help investors make predictions about the future of the company, such as a possible move away from some kinds of products and services. Companies considering mergers and acquisitions keep a close eye on business segment reporting to decide if a company would be a good investment and to help with decisions about how to reorganize after a deal.

People working within an individual business segment report to their own managers and personnel. The heads of the segment are responsible for communicating with the rest of the company. They meet with board members and other officials to discuss performance, areas where the segment needs improvement, and other topics. When the company orders the business segment to make changes, these personnel must implement it, meeting with their own staff to discuss cuts as well as shifts in business goals.