What it means
At its simplest, the chart answers the question of who is responsible for what. Each box represents a role or a person and each line represents a reporting relationship.
A new joiner can read it in a minute and understand how the business hangs together. The chart matters to finance because people costs are normally the largest expense in a services business.
Each box on the chart usually corresponds to a salary, a budget or a cost centre, so headcount planning is really a redrawing of the chart. When a manager asks to hire three more analysts, the finance team can see which part of the structure grows and what that does to spans of control.
Charts come in several shapes. A traditional hierarchy has clear layers of management, a flat structure has few layers and wide teams, and a matrix structure gives some people two bosses, such as a functional manager and a project manager.
Each shape has different implications for cost, speed of decision-making and control. The chart also underpins internal controls.
Segregation of duties, approval limits and delegations of authority all rely on knowing who sits where and who can sign off what. An out-of-date chart is a quiet risk because payments, access rights and responsibilities can end up with the wrong person.
Several measures are drawn from the chart. The number of layers between the chief executive and the front line shows how bureaucratic the business is, while the average span of control shows how thinly managers are stretched.
Comparing these figures year by year highlights when growth has outpaced structure. Finally, the chart is a communication tool in mergers and restructurings.
Buyers ask for it during due diligence to see who holds the knowledge, and employees read it to learn where they fit. A chart that is clear, current and consistent with the payroll list builds confidence on both sides.
In practice
Real-world examples.
Example
A founder preparing for investment due diligence draws up a chart of her 40-person company. Investors use it to check whether key functions such as finance and sales are led by senior people, and whether the founder is a single point of failure.
Example
A CFO restructures her finance team from three layers to two. The redrawn chart removes two supervisor roles and widens the span of control for the remaining managers. She uses it to explain to the board how the change saves cost without losing coverage, and the finance team re-bases the payroll budget on the new structure.
Example
An internal auditor tests whether the person who approves supplier payments also reports to the person who sets up suppliers. The chart reveals a reporting line that undermines segregation of duties, and the auditor raises it as a control weakness. Management agrees to move the supplier set-up role into the operations team within a month.
Case study
Seen in the real world.
Riverstone Clinics is a fictional group of dental practices, and this story is illustrative. The group had grown from four practices to fourteen through a series of small deals, and nobody had redrawn the chart in three years.
When the finance director mapped actual reporting lines, she found that nine practice managers reported directly to the managing director, who also approved most invoices. The spans of control were far too wide for one person, and invoice approval was creating a delay of nearly a week.
The group introduced three regional managers and moved invoice approval down to them within agreed limits. Each regional manager now oversees four or five practices, which brought the managing director's direct reports down from nine to three. The illustrative lesson is that the chart is not only a picture of the business but a working tool for seeing where decisions queue up.
Watch out
Common mistakes.
- Treating the chart as a one-off exercise, when it needs updating whenever roles, reporting lines or approval limits change.
- Assuming the chart shows how work really gets done, when informal relationships often matter as much as formal lines.
- Ignoring the cost behind each box, when every role on the chart carries salary, benefits and overhead.
Questions
People also ask.
What is a span of control?
It is the number of people who report directly to one manager, and a very wide or very narrow span usually signals a structural problem.
Should contractors appear on the chart?
Many companies show them in a different style, because they affect cost and oversight even though they are not employees.
Who should own the chart?
Human resources usually maintains it, but finance should review it regularly because it drives budgets and approval authorities.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related