What are Management Entities?

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.

  1. Management Entity, or Business Units.
  2. Departments and Divisions.
  3. Business Functions.
  4. Cost centers.
  5. Profit Centers.
  6. Business Locations.
  7. Product Lines.
  8. 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

Creation Date Thursday, 29 December 2022 Hits 865

You May Also Like

  • Divisional Organizational Structures

    Divisional Organizational Structures

    The divisional structure or product structure consists of self-contained divisions. A division is a collection of functions which produce a product. It also utilizes a plan to compete and operate as a separate business or profit center. Divisional structure is based on external or internal parameters like product /customer segment/ geographical location etc.

  • Record to Report Process

    Record to Report Process

    Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts. 

  • Concept of Foreign Branches

    Concept of Foreign Branches

    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.

  • Hierarchical Organization Structures

    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.

  • Team-Based Organizational Structure

    Team-Based Organizational Structure

    Team-based structure is a relatively new structure that opposes the traditional hierarchical structure and it slowly gaining acceptance in the corporate world. In such a structure, employees come together as team in order to fulfill their tasks that serve a common goal.

  • Organizational Design

    Organizational Design

    An organizational design is the process by which a company defines and manages elements of structure so that an organization can control the activities necessary to achieve its goals. Good organizational structure and design helps improve communication, increase productivity, and inspire innovation. Organizational structure is the formal system of task and activity relationships to clearly define how people coordinate their actions and use resources to achieve organizational goals.

  • Concept of Legal Entity

    Concept of Legal Entity

    A legal entity is an artificial person having separate legal standing in the eyes of law. A Legal entity represents a legal company for which you prepare fiscal or tax reports. A legal entity is any company or organization that has legal rights and responsibilities, including tax filings.

  • Concept of Subsidiaries

    Concept of Subsidiaries

    A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.

  • Global Business Services (GBS) Model

    Global Business Services (GBS) Model

    Global business services (GBS) is an integrated, scalable, and mature version of the shared services model. Global Business Services Model is a result of shared services maturing and evolving on a global scale. It is represented by the growth and maturity of the Shared services to better service the global corporations they support.

  • GL - Intercompany Accounting

    GL - Intercompany Accounting

    After reading this article the learner should be able to understand the meaning of intercompany and different types of intercompany transactions that can occur. Understand why intercompany transactions are addressed when preparing consolidated financial statements, differentiate between upstream and downstream intercompany transactions, and understand the concept of intercompany reconciliations.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved