This is the second instalment in a series of five blogs on how delaware’s Finance Transformation Roadmap can help you move your organization towards becoming a ‘Best in Class’ business partner. We began this series focused on the Operate responsibilities of your finance back-office. Today, we shift to transformation of the Analyze tasks. This domain focuses on gathering data from different sources, exploring it and bringing insights to stakeholders across the company to enable solid business decision-making. Once again we will break this down into analyzing the three maturity waves: efficiency, effectiveness and value creation. The goal is to move your team into the value creation quadrant by adopting SAP’s digital platform solution offerings in SAP S/4HANA.
In the Analyze domain we shift to the transformation of management accounting and control which provides both an internal and external view of how your organization is performing. This domain focuses on gathering data from different sources, exploring it and bringing insights to stakeholders across the company to enable solid business decision-making.
Boosting Efficiency incorporates setting up analytical accounting to review the information in your accounts and to analyze how, when and why your business spends and receives money. Analytical accounting offers two main perspectives: the external market view and the internal responsibility view.
When setting up analytical accounting, it is key to initially define which dimensions you want to manage. These are typically related to customer and product segmentation, which is used to follow up on sales performance by country, region, distribution channels, customer etc. This is the external market view. Analytical accounting is also used to determine at which level the company should support operational decision-making or streamline its processes to monitor costs in cost centers, profit centers, internal projects, orders, and more – the internal responsibility view.
Take, for example, a manufacturing company that wants to view the profitability of its equipment sales by product line. Establishing profit centers at this level or even plant level gives the ability to monitor revenue and costs in tracking performance of each product and production site. Investment and/or marketing decisions can be made to improve results and ensure internal planning goals are met.
Analytical accounting empowers the shift from periodic general accounting reporting to cost-of-sales reporting. While periodic reporting offers a corporate overview of accounting, cost-of-sales reporting offers richer insight into customer/product combinations.
Boosting Effectiveness is next level controlling where your organization monitors financial performance by holding line management accountable for revenues and costs under their control. This ensures that management receives actionable, controllable numbers that they can take responsibility for. But first, it’s necessary to clearly define the domain of responsibility as well as the data stream providing valuable insights into the company’s true cost drivers. At delaware, we use our responsibility accounting framework (RAF) to help our customers define these elements.
Using the delaware RAF, we group and assign costs and revenues to functional areas, such as manufacturing, sales and distribution, purchasing and logistics. This enables a meaningful P&L for each responsibility center that only includes manageable costs and revenue streams, containing customer and product insights, down to the gross margin level for a selection of responsibilities. Costs and income not assigned to specific functional areas are centralized on a case by-case basis according to their nature.
To pinpoint the full profitability of products or customers across the supply chain, net margin analysis, also known as cost-to-serve (CTS), can help. This is a modeling technique that offers insight into every cost an organization incurs in the process of delivering a product or service to a customer. Unlike traditional accounting methods, which calculate gross margin by subtracting the cost of goods sold from the net sales value. CTS unveils the cost of every customer-driven action – all the way from order receipt and product delivery to the customer’s shelf.
Introducing net margin analysis into your accounting and control processes enables you to provide a full P&L down to the net margin by business dimension. As a result, it’s the ultimate data source for advanced profitability analysis. Use it to draft an action plan to turn unprofitable products or customers into profitable ones. Modify manufacturing or logistics processes to optimize efficiency. Adapt commercial strategies by modifying pricing and discounting, renegotiating contracts, restructuring distribution channels or abandoning specific products, services or customers.
CTS analysis is not a one-off exercise. As businesses today are changing at lightning speed, it is key for you to continuously review the outcomes of the actions taken and reassess and adjust them wherever needed.
Creating Value takes this approach into the future by supporting strategic business decisions through ‘what if’ analyses. Use this modeling technique, for example, in sales decision-making, to flexibly create different customer profitability scenarios. Or, apply it during the tendering process or promotional actions by generating different scenarios using a variety of products and models.
In short, business/scenario modeling provides powerful answers to key questions like: “What if we replace product A with product B?” “What if we change our sales prices or discount scheme?” “What happens if we alter our distribution channels or shift manufacturing activities to other regions?” This modeling capability provides the power to swiftly adjust your business to market conditions.
Obtaining insights into your customer’s profitability behavior – such as which products they prefer, or how much they are willing to pay – offers competitive advantages. By accurately predicting when stocks will need replenishment and preemptively arranging for vendors to supply them at the right time, you will achieve operational excellence and manage cash flow more effectively. Qualitative, strategic data insights can be gathered using competing on analytics modeling, which relies on historical and real-time data from user interactions and other sources to make predictions and suggestions. Leveraging the right tools will set you apart in the marketplace as your organization is quicker to react and focus on those areas requiring attention.
This blog series will conclude with a three part webinar series on the following topics. This page will be updated with more information on these sessions.