Finances are the lifeblood of any business, from fledgling startups to established corporations. Our “A Startup’s Guide To Becoming Financially Savvy” post highlights that financial health is more than just having enough capital; it’s also about managing finances efficiently and accurately. As such, organization is key, especially in the world of complex professional and department relationships. This is where account hierarchy comes in—a structured approach to classifying and managing your accounts. But what exactly is it, and why should your business care? Here’s a deeper dive into what account hierarchy is and how it can make your business more efficient:
What is account hierarchy?
Financial management can be a complicated process, which is why structure and order can come in handy through an account hierarchy. Softrax defines account hierarchy as a financial system that refers to the structure, organization, and categorization of accounts to ease financial reporting, analysis, and management. While a business’s account hierarchies can vary depending on company or industry needs, they typically include certain components. The chart of accounts is the basis of the account hierarchy, which lists all accounts a company uses to record its financial transactions. These accounts can also be branched out into assets, liabilities, equity, revenue, and expenses, which can meaningfully aid in organizing and summarizing financial data; each category can also have its own sub-accounts for more detailed management.
Why does account hierarchy matter?
Account hierarchy can make financial management, analysis, and reporting easier and more efficient. It provides a clear visual representation of a company’s financial status and if the organization is logical and consistent throughout every tier of the business. For small and medium enterprises, it can help provide a gateway into financial expertise and literacy. Fintech Nexus explains that SMEs can encounter various challenges without financial know-how. You may struggle to maintain accurate and updated financial records, comply with accounting regulations, or monitor cash flow and financial performance to make smart decisions. When you understand how your accounts are structured, you get a better view of your organization’s financial health.
Developing an account hierarchy
As mentioned, your account hierarchy will be influenced by your company or industry’s needs. You can start by identifying the levels or roles within your hierarchy, such as job titles or departments. You can have your chart of accounts start from C-level executives, branching out to directors, then managers, and so on. You can also consider other aspects of the business, such as geography, industry, or products. Regional or location segments can also organize accounts based on geographical location, aiding targeted marketing and sales efforts. You can also group accounts by industry sector, allowing for industry-specific communication and service offerings. Organizing based on product lines or services, you offer can help you monitor the performance of different product lines and how much profit each generates.
An example of this is Intel’s new financial reporting structure. Intel Foundry, its new operating segment, includes foundry manufacturing and supply chain, as well as foundry technology development. The new structure acknowledges revenue from Client Computing Group, Network and Edge and Data Center, and AI, among other clients and products. Doing so helps improve transparency, growth, and accountability across the business.
By implementing a well-defined account hierarchy, you gain a clear understanding of your company structure and industry landscape, fostering stronger relationships, improving efficiency, and, ultimately, driving business growth.
