The primary consideration in any financial modeling exercise for a company is its structure. Effective communication between various departments and employees is a critical component of financial success. It is imperative to gain an understanding of the various types of company structures, including their advantages and disadvantages.
Conducting a detailed analysis of the different divisions within a prospective company can also be a valuable exercise. This allows the CEO to set realistic expectations for the organization that can be met in the future. Neglecting to consider the fundamentals of organizational processes has proven detrimental to many start-ups. It is essential to acquire knowledge of the various aspects of a successful company in order to establish a profitable venture.
Which type of a company organization is the best?
A short answer to this question is “No one”, yet a more elaborate one will include the term “Hybrid”. Feel confused? It is recommended that you delve deeper into this subject matter. Let us start with the famous quote of a radio financial analyst Larry Burkett:
“In business, an organization is an absolute necessity, not an alternative”.
During any adequate financial modeling you will encounter these basic four types of organizational structure.
Functional
Employees are grouped based on their skills and experience. This aids in the creation of the most efficient horizontal communication. This type of organizational structure is frequently observed in accounting (https://savedbythecents.com/why-does-your-business-need-an-accounts-department/) and IT departments of contemporary companies.
Divisional
Employees are grouped based on the product or service they are currently working on. A prime example would be regional divisions, which produce a similar product with variations based on their location.
Hybrid
It combines both functional and divisional organizational structures into a single business. The choice of either of these two types for a department depends on the complexity of the product or target group. The hybrid structure allows the CEO to establish the most effective working environment.
Matrix
A highly specialized type of organizational structure that expands on functional and divisional principles at a company level. Valve, an IT company renowned for its horizontal management, is one of the best examples of this structure. Employees are free to work on or propose any project they desire, and vertical decisions are a rare occurrence there.
The Hybrid organizational structure is the most widely adopted among companies with a market value exceeding 1 billion USD, and it is recommended for large companies. Smaller startups, on the other hand, are advised to adhere to the Functional organizational structure.
Common examples of business divisions
Mike Irvin, an elite business coach, often says in his lectures:
“There are nine distinct divisions to every business – no matter how new, or how small they are”.
It is important to understand each of these fundamental types of organizational structure in order to achieve success in financial modeling:
- Leadership.
- Marketing.
- Legal.
- Finance.
- R&D.
- Sales.
- Production.
- HR.
- QA.
Learning these basics is necessary to step to successful financial modeling. Take the time to acquire this knowledge, as it will translate into financial gain in the future.