What are Management Entities?
In this article we will discuss various types of "Management Entities". Various types of operational units, are created by management, to effectively run, manage and control their business. Different types of functional units, and divisional units, are widely used across industry.
In this article, we will discuss various types of "Management Entities".
Various types of operational units, are created by management, to effectively run, manage and control their business.
Different types of functional units, and divisional units, are widely used across industry.
What are some commonly used, "Management Entities"?
Various types of operational units, functional units and divisional units, that are widely used across industry are.
- Management Entity, or Business Units.
- Departments and Divisions.
- Business Functions.
- Cost centers.
- Profit Centers.
- Business Locations.
- Product Lines.
- Project Area.
Why Management Entities?
Internally, an organization can be structured in many different ways.
A large number of entities, can be created and tracked, depending on the management‘s objectives.
We have seen in our earlier article on Legal entities, that the legal entities are required, to be defined for external reporting, and compliance.
However, Management defines management entities, primarily for driving internal objectives.
They need these operational units, to efficiently manage their business, and effectively run it.
We know that big multinational organizations, operate in a matrix environment.
Management entities facilitate, division of responsibilities, and enables seamless flow of information, across the organization.
By defining required management entities, management can enable, tracking of various operations, financials, or profitability, for each of these entities.
These different views, can enable, granular tracking of business operations, by various dimensions, like, geographies, countries, locations, business segments, product lines, cost centres, functions, COE’s etc.
That's why, these entities are also, sometime referred to as "operating units".
Definition of Management Entity.
Actually, in real business parlance, A Management Entity, could mean anything, that the management wants.
It could be a business division, a specific type of unit, or department, or even a business function.
Some of the attributes, generally associated with management entities are.
Management of Funds; Management entities manage, on a discretionary basis, funds or portfolios, pursuant to a business mandate.
Used for financial reporting, and enables tracking of expenses, at a granular level.
These entities serve independently of legal entities.
Essentially, it is an autonomous, or a semi-autonomous, operating unit.
They are generally created to, meet strategic business objectives.
They help the management to better manage, their business activities.
They are created primarily, to promote business efficiency.
In our next articles, we will cover detailed discussions on, how companies use departments, functions, cost centres, locations, product lines etc., to create different management entities, and reporting dimensions.
Business Functions
An operating unit that represents a category or functional part of an organization that performs a specific task to support business activity, such as sales or marketing to support business development. Used to report on functional areas. A support function may have allocated budgets and may consist of a group of cost centers.
Organization Support Functions
Self-directed activity systems of an organization concerned with establishing and maintaining the organization as an entity. Each organization support function provides support to all functions, business, business support and other organization support functions. For example, corporate finance, IT functions, administration and knowledge management. An organization support function may have allocated budgets and may consist of a group of cost centers.
Cost centers
A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company. Examples of cost centers include marketing & finance departments. It is an operating unit in which managers are accountable for budgeted and actual expenditures. Used for the management and operational control of business processes that may span legal entities.
Profit Centers
A profit center is a part of a corporation that directly adds to its profit, treated as a separate business and for which the profits or losses are calculated separately. This operating unit is held accountable for both revenues, and costs (expenses), and therefore, profits. Different profit centers are separated for accounting purposes so that the management can measure their relative efficiency and profit.
Business Locations/ Countries/ Geography/ Supplier & Customer Locations
Organizations operate from more than one location and may need to track where a particular financial transaction occurred. Some examples of need to track different locations could be transactions through sales offices, factories, subsidiaries etc. Organizations may even need to analyze the financial information based on the supplier’s or customer’s location may require a location segment dedicated to this. However this has very limited application in terms of usefulness. E.g. software companies cater to clients from all over the world & may like to make strategies based on which customer territory contributed how much to the revenue & hence a customer location is an important segment but for a manufacturing organization this will hold no relevance.
Product Lines/Service Lines
Some organizations deal in products which are low in volume but high in value. These organizations would like to analyze their costs & revenue for individual products. They also need to apportion indirect costs & revenues to these products/services so that the financials provide a full picture on product performance. On the other hand, a supermarket dealing in thousands of product might not have any interest in recording every transaction against the individual product or track financials at product level. Further each legal entity in the group may have its own set of released products that it wants to include in transaction documents.
Project Area
Certain organizations have their business models build around project activities. E.g. a property developer may like to have all its cost & revenue against individual projects. These organizations may have multiple projects running under same legal entity. There projects have their own budget & statutory requirements & hence their own trial balance.
Related Links
You May Also Like
-
Matrix Organizational Structures
In recent times the two types of organization structures which have evolved are the matrix organization and the network organization. Rigid departmentalization is being complemented by the use of teams that cross over traditional departmental lines.
-
Multitude of these legal and operational structures clubbed with accounting and reporting needs give rise to many reporting dimensions at which the organization may want to track or report its operational metrics and financial results. This is where business dimensions play a vital role.
-
GL - Different Accounting Methods
The accounting method refers to the rules a company follows in reporting revenues and expenses. Understand the two common systems of bookkeeping, single, and double-entry accounting systems. Learners will also understand the two most common accounting methods; cash and accrual methods of accounting and the advantages and disadvantages of using them.
-
In this article, we explain some commonly used subsidiary ledgers like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger, and cash receipts or payments subsidiary ledger.
-
As the business grows, the company may want to transition to a branch structure as branches are allowed to conduct a much broader range of activity than representative offices. Branches can buy and sell goods, sign contracts, build things, render services, and generally everything that a regular business can do. A company expands its business by opening up its branch offices in various parts of the country as well as in other countries.
-
General Ledger - Advanced Features
Modern automated general ledger systems provide detailed and powerful support for financial reporting and budgeting and can report against multiple legal entities from the single system. These systems offer many advanced functionalities right from journal capture to advanced reporting. This article will provide an overview of some advanced features available in today's General Ledgers.
-
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
-
Functional Organizational Structures
A functional organizational structure is a structure that consists of activities such as coordination, supervision and task allocation. The organizational structure determines how the organization performs or operates. The term organizational structure refers to how the people in an organization are grouped and to whom they report.
-
Defining Organizational Hierarchies
A hierarchy is an ordered series of related objects. You can relate hierarchy with “pyramid” - where each step of the pyramid is subordinate to the one above it. One can use drill up or down to perform multi-dimensional analysis with a hierarchy. Multi-dimensional analysis uses dimension objects organized in a meaningful order and allows users to observe data from various viewpoints.
-
An account inquiry is a review of any type of financial account, whether it be a depository account or a credit account. In this tutorial, you learn what we mean by drill through functionality in the context of the general ledger system. We will explain the concept of drill-down and how it enables users to perform account and transaction inquiry at a granular level and the benefits of using this functionality.
