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.
Meaning of 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. These hierarchies need to be mapped to systems to ensure they are capturing the relevant business process information at relevant nodes to provide meaningful information for internal and external reporting.
Example
The account hierarchy allows you to map complex organizational structures of a business partner (for example, buying group, co-operative or chain of retail outlets). When you create a hierarchy structure, you form groups of business partners (for example, for purchasing groups). You can use them for statistical purposes and for marketing and accounting and other meaningful analyses.
Organizational hierarchies
Organizational hierarchies represent the relationships between the units/segments that make up your business.
Larger organizations may require some hierarchies that are based on business units and other hierarchies that are based on shared services, such as human resources and IT. They need to create cost centers in shared service departments and position them under business units, so that the costs of shared services are appropriately allocated. Now we will explore some examples of reporting needs arising out of these different hierarchies and dimensions. Any how they add complexity at transactional level to record relevant information appropriately.
Some areas where we need to deal with dimensions/hierarchies are:
Legal Structure
- Legal Entities
- Subsidiaries
- Tax Entities
- Statutory Entities
Operational Structure
- Business Units/Management Entity
- Divisions/Departments
- Business Functions
- Business Support Functions
- Organization Support Functions
- Cost Centers
- Profit Centers
- Business Employee Hierarchy
- Business Area /Project Area/ Controlling Area/ Product Lines/Service Lines
- Countries/Geography/Locations
- Accounts/Sub Accounts
Importance of Hierarchies
Defining organizational hierarchies enable to view and report on your business from different perspectives. You set up a hierarchy of legal entities for tax, legal, regulatory or statutory reporting. Various Legal entities can enter into legal contracts and are required to prepare statements that report on their performance. While performing business activities we need to capture and classify transactions at legal entity level to be able to identify transactions that belong to a specific legal entity. Therefore, there exists a need to define boundary at legal entity level to enable data classification, consolidation, security and reporting at these entity levels.
Example
A large corporate may create a central mailroom to receive all invoices from its vendors for which it need to make payment. These invoices are raised on separate legal entities within the same corporate group, but mailed to a central processing center for accounting and payment. The shared service resource who is working on these invoices must specify in the Accounting System the different legal entities to ensure proper treatment of these transactions. The payments should be issued from the respective bank accounts belonging to the legal entity on which the invoice has been raised.
You can create a hierarchy for purchasing function to control purchasing policies, rules, and business processes.
Related Links
You May Also Like
-
The sole trader organization (also called proprietorship) is the oldest form of organization and the most common form of organization for small businesses even today. In a proprietorship the enterprise is owned and controlled only by one person. This form is one of the most popular forms because of the advantages it offers. It is the simplest and easiest to form.
-
Introduction to Organizational Structures
Organizations are systems of some interacting components. Levitt (1965) sets out a basic framework for understanding organizations. This framework emphasizes four major internal components such as: task, people, technology, and structure. The task of the organization is its mission, purpose or goal for existence. The people are the human resources of the organization.
-
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.
-
Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.
-
GL - Recurring Journal Entries
A “Recurring Journal” is a journal that needs to be repeated and processed periodically. Recurring Entries are business transactions that are repeated regularly, such as fixed rent or insurance to be paid every month. Learn the various methods that can be used to generate recurring journals. See some examples and explore the generic process to create recurring journals in any automated system.
-
For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Understand the concept of the subsidiary ledgers and control accounts.
-
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. A joint venture takes place when two or more parties come together to take on one project.
-
Business Metrics for Management Reporting
Business metric is a quantifiable measure of an organization's behavior, activities, and performance used to access the status of the targeted business process. Traditionally many metrics were finance based, inwardly focusing on the performance of the organization. Businesses can use various metrics available to monitor, evaluate, and improve their performance across any of the focus areas like sales, sourcing, IT or operations.
-
Legal Structures for Multinational Companies
A multinational company generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. A multinational company (MNC)is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country.
-
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.
