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.
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.
Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.
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.
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.
Reversing Journals are special journals that are automatically reversed after a specified date. A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. See an example of reversing journal entry!
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.
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.
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.
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.
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.
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