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.
Various types of operational units, functional units and divisional units, that are widely used across industry are.
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".
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.
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.
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.
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.
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.
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.
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.
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.
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.
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
Hierarchical Organization Structures
Hierarchical structure is typical for larger businesses and organizations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organization. The decision-making process is typically formal and flows from the top down.
GL - Recurring Journal Entries
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Legal Structures for Multinational Companies
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Global Business Services (GBS) Model
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In this article we will help you understand the double-entry accounting system and state the accounting equation and define each element of the equation. Then we will describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.
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