Account Hierarchy

What is Account Hierarchy?

The term “account hierarchy” is used in a business or financial system to refer to the structure, organization, and categorization of accounts to ease financial reporting, analysis, and management.

Account hierarchies vary depending on an organization’s industry or needs, but often includes the following:

Chart of Accounts: The foundation of the account hierarchy is the chart of accounts, which is a list of all accounts a company uses to record its financial transactions. Each account is assigned a unique account code or number for identification.

Account Categories or Types: Accounts are often grouped into categories, such as assets, liabilities, equity, revenue, and expenses. These categories help in summarizing financial data into meaningful sections.

Sub-Accounts: Under each category or type, there can be sub-accounts or subcategories. For example, under the assets category, you might have sub-accounts for cash, accounts receivable, inventory, etc. This classification provides more detailed information about specific types of transactions.

Cost Centers or Departments: In larger organizations, accounts can be further organized based on cost centers or departments to allow for the tracking of expenses and revenues associated with specific business units or functions.

Geographical Segments: Accounts can be organized based on geographical segments, helping companies analyze financial performance by region or country.

Product Lines or Services: Some companies organize accounts based on product lines or services they offer. One benefit of this type of classification is that is helps in the evaluation of the profitability of different product lines.

Projects or Clients: Businesses involved in project-based work or providing services to various clients may organize accounts around specific projects or clients to track financial performance for each.

Level of Detail: The hierarchy can also include various levels of detail, with higher-level accounts representing summary figures and lower-level accounts providing more detailed information.

Why is Account Hierarchy Important?

Account hierarchies are crucial for financial reporting, budgeting, and decision-making. They ensure that financial data is organized in a logical and consistent manner, making it easier for stakeholders to understand the company’s financial health and performance. The specific hierarchy can vary widely from one organization to another, depending on its size, industry, and reporting requirements, but having an easily accessible and understandable account hierarchy is key for financial stakeholders to understand a company’s financial status.

How Does Account Hierarchy Work?

An Account Hierarchy works by organizing and structuring user accounts or organizational accounts in a hierarchical manner to manage access, permissions, and responsibilities effectively. 

A general guide to getting started includes:

Define Your Objectives: Determine why you need an account hierarchy. Some common objectives  or reasons include managing access control, organizing users or entities, and delegating responsibilities. 

Identify Levels or Roles: Identify the levels or roles within your hierarchy. These could be based on job titles, departments, or functional areas.

Account Hierarchy Example

Create User Accounts: Make individual user accounts for each person / entity within your organization, ensuring that each account corresponds to the appropriate level or role. 

Group Users: Arrange users in groups based on their roles or levels. Many systems allow you to create groups or teams to simplify permissions and access management. 

Define Permissions: Assign permissions and access rights, which can include read, write, delete, or administrative permissions. 

Establish Access Control: Implement access control mechanisms that ensure users can only access the resources and data assigned to them. This access control can involve setting up authentication and authorization protocols. 

Delegate Responsibilities: If your hierarchy includes delegation of responsibilities, clearly define who has the authority to make decisions or perform specific tasks within each level or role. 

Testing and Validation: Before fully implementing your account hierarchy, test it with a small group of users to ensure that the permissions and access levels are correctly configured. 

Documentation: Document your account hierarchy structure, including user roles, permissions, and access control policies. This documentation will be crucial for training new users and for auditing purposes. 

Implementation: Roll out the account hierarchy system organization-wide or to the intended user base. Ensure that users understand their roles and responsibilities within the hierarchy. 

Enabling Security Measures: Implement security measures to protect user accounts, such as password policies, two-factor authentication (2FA), and monitoring for unusual account activity. 

Monitoring and Auditing: Continuously monitor user activity and periodically audit the account hierarchy to identify and address any security or access issues. 

Account Hierarchy and Parent / Child Relationships

Many accounts in hierarchical groupings have structures similar to parent-child relationships. This structure is often used in accounting, finance, and business management to organize and represent the relationships between different accounts. Here is how it works:

Parent Account: A parent account is the higher level account in the hierarchy and typically represents a broader category or group of related accounts. For example, in a chart of accounts, an “Expenses” account might be a parent account that encompasses a number of expense categories.

Child Account: A child account is a sub-account that falls under a parent account, reflecting a more detailed view that the parent account. For example, the “Expenses” parent account, might have child accounts like “Utilities Expense,” “Office Supplies Expense,” and “Travel Expense.”

The parent-child relationship allows for a structured and organized way to categorize financial transactions. It also enables businesses to track and report on financial data at various levels of granularity. When financial data is recorded in this hierarchical manner, it becomes easier to analyze, allowing the company to use the data in a strategic manner. e decisions about an organization’s financial performance and resources.

How Do You Manage Account Hierarchy?

Managing an account hierarchy involves overseeing and maintaining the structure of user or organizational accounts within a system or platform.

Here’s a step-by-step guide on how to manage an account hierarchy:

  1. Access Control PoliciesEstablish and document access control policies that define user roles, responsibilities, and permissions within the hierarchy. Clearly specify what each role can and cannot do.

  2. User OnboardingWhen new users or entities join your organization or system, ensure they are properly onboarded. Create user accounts and assign them to the appropriate roles based on their responsibilities.

  3. User OffboardingWhen users leave the organization or change roles, promptly update their account status. Revoke access to resources and data that are no longer needed, following security best practices.

  4. Parent / Child Classification Checks: Regularly check to make sure that the parent / child account structures make sense and reflect the true relationships between groups.

  5. Regular AuditsConduct regular audits of user accounts and permissions to ensure they align with organizational requirements. Identify and rectify any discrepancies, such as excessive permissions or outdated accounts.

  6. Change ManagementImplement a change management process for modifications to the account hierarchy. Ensure that changes are well-documented, tested, and communicated to relevant stakeholders before implementation.

  7. Access Requests and ApprovalsEstablish a process for users to request additional access or changes to their permissions. These requests should go through an approval process to prevent unauthorized access.

  8. User Training and EducationContinuously educate users about their roles and responsibilities within the account hierarchy. Provide training on security best practices to minimize risks.

  9. Security MeasuresEnforce strong password policies, encourage the use of multi-factor authentication (MFA), and monitor user activity for unusual behavior. Implement security measures to protect user accounts from threats.

  10. Documentation UpdatesKeep detailed documentation of the account hierarchy structure, access control policies, and any changes made. Ensure that documentation reflects the current state of the hierarchy.

  11. Incident Response PlanDevelop an incident response plan to address security breaches or unauthorized access incidents. This plan should outline steps to take in case of a security incident and should be regularly tested.

  12. Monitoring and AlertsImplement monitoring systems that can detect and alert you to suspicious or unauthorized activities within the account hierarchy. Proactive monitoring helps prevent security breaches.

  13. Compliance and RegulationsStay informed about relevant compliance regulations and ensure that your account hierarchy and access control policies align with these requirements. Conduct regular compliance audits.

  14. Feedback and ImprovementEncourage users to provide feedback on the account hierarchy and access control processes. Use this feedback to make improvements and address concerns.

  15. Backup and RecoveryImplement backup and recovery procedures to ensure that account hierarchy data can be restored in case of data loss or system failures.

  16. Regular MaintenanceContinuously review and update the account hierarchy as organizational needs change. Ensure that the hierarchy remains efficient, secure, and aligned with the business objectives.

What are the Benefits of an Account Hierarchy?

There are a number of benefits to using an account hierarchy structure, including:

  • Improved Organization: Account hierarchies help organize data and resources, making it easier to manage and access information, especially in large and complex organizations.

  • Enhanced Visibility: With a clear hierarchy in place, it’s easier to see the relationships between different accounts and how they are interconnected.

  • Access Control: Access control polices can be defined and enforced through the account hierarchy structure, assigning permissions and roles based on the hierarchy.

  • Streamlined Reporting: Hierarchical structures allow for easier report generation and data analysis.

  • Delegation of Authority: Account hierarchies allow for the delegation of authority and responsibility, and managers at different levels can have control over respective segments, reducing the burden on the top-level executives.

  • Scalability: As an organization grows or changes, the account hierarchy can be adapted to accommodate new departments, teams, or business units. This scalability ensures that the structure remains relevant and effective over time.

  • Cost Allocation: Account hierarchies can be used to allocate costs and expenses across different parts of the organization, which is useful for budget tracking and management.

  • Simplified Auditing and Compliance: When accounts are organized hierarchically, it’s easier to audit and ensure compliance with regulatory requirements.

  • Strategic Decision-Making: Having a well-defined account hierarchy can assist management in making strategic decisions. They can quickly assess the performance and health of different parts of the organization.

  • Data Consistency: Account hierarchies help maintain data consistency through the standardization of how information is categorized and stored. This helps to reduce the likelihood of data errors and inconsistencies.

What Types of Companies Would Use Account Hierarchies?

Account hierarchies are used by a wide range of companies, with the decision to implement an account hierarchy often depending on the complexity of the company’s operations and its reporting needs.

Some types of companies using Account Hierarchies include:

Large Corporations: Large corporations – especially those with multinational locations – that have diverse business units, subsidiaries, and operating segments often use account hierarchies to manage and analyze financial data.

Retailers: Retail companies often use account hierarchies to categorize sales, expenses, and revenue streams, making it easier to assess the performance of different elements of the business.

Manufacturing Companies: Manufacturers many times use account hierarchies to track production costs, manage inventory, and allocate expenses across various product lines or manufacturing facilities.

Financial Institutions: Banks, insurance companies, and other financial institutions use account hierarchies to manage and report on a wide range of financial products, services, and accounts.

Healthcare Providers: Hospitals, healthcare organizations, and other companies in the healthcare industry use account hierarchies to track patient services, manage expenses by department or service line, and report on financial performance.

Technology Companies: Technology firms may use account hierarchies to manage expenses and revenue associated with different product lines, software platforms, or service offerings.

Nonprofit Organizations: Nonprofits use account hierarchies to track donations, grants, program expenses, and administrative costs, ensuring transparency and accountability in financial reporting.

Government Entities: Government agencies at various levels use account hierarchies to manage budgets, track expenditures, and report on government programs and services.

Utilities: Utility companies use account hierarchies to monitor and analyze expenses related to different utilities (e.g., electricity, water, gas), service areas, and customer segments.

Hospitality and Tourism: Hotels, resorts, and travel companies utilize account hierarchies to analyze revenue, expenses, and occupancy rates across different properties, regions, and business units.

E-commerce Businesses: E-commerce companies can employ account hierarchies to categorize sales, advertising expenses, and fulfillment costs for different product categories or marketplaces.

Manufacturers of Consumer Packaged Goods (CPG): CPG manufacturers often use account hierarchies to track product sales, production costs, and distribution expenses for various product lines and brands.

Agriculture and Agribusiness: Agriculture companies use account hierarchies to manage expenses associated with different crops, farming operations, and agricultural products.

Automotive Industry: Companies in the automotive sector use account hierarchies to monitor manufacturing costs, sales revenues, and expenses by product lines or vehicle models.

Real Estate and Property Management: Real estate firms and property management companies use account hierarchies to manage rental income, property expenses, and maintenance costs for different properties or portfolios.

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