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Financials within ERP systems

www.siliconlabs.fi
16.11.2012

1500-1950 1960-2010 2010->
The evolution of financial systems
The development of financial systems started in the 1500s, after the roman numbers were abandoned and the double-entry
bookkeeping was invented by a venetian monk and magician Luca Pacioli in. Before then the cash in hand was simply counted at the
end of the day and there was no real knowlegde of the financial state of the company.

The manual period lasted for hundreds of years. Not until in the mid-1900s mechanical devices and the first computer programs
started to appear in the big companies.

The first minicomputers came to market in the 1970s , which made standard accounting software affordable also for mid-sized
companies. The era of the integrated systems (ERP) started in the late 1990. The national account laws then also started to accept
the electronic recording and storage of accounting material.

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The changing role of accounting
Source: Granlund & Lukka 1998
Todays CFOs are expected to skip their calculators and watchdog roles and start acting
as future focused members of Management teams.
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Financial Excellence requires the RightPyramid

The ability conduct a fast a fast, high-quality close distinguishes the top performers from
the average, giving them a competitive advantage. The winners have integrated financial
and information systems, streamlined and standardized closing and reporting processes
without manual work, redundancy and rework.
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The evolution of finance to a significant
group function (I)
- First multinational company (about 1500)
- Line of business: sales of silver and copper, banking and international trade
- Headquarters in Augsburg Germany and offices all around Europe
Challenge:
-> How to control a large office
network (Globalization)
Solution:
Implementation of
double-entry book-
keeping

Implementation of Group
reporting. The offices had
to regularly report to the
headquarter their
accounting figures and
local market information.
Jacob Fugger with his CFO
Matthus Schwarz in in their
Golden Office
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The evolution of finance to a
significant group function (II)
- President of General Motors Corporation (in the 1920-30s)
- The creator of the first modern company
- Led GM to become the largest corporation on earth
- Employed semi-autonomous strategic business units (SBU's), with centralized
support functions
Challenge:
-> How control the
economic succes of a large,
decentralized, diversified,
multi-divisional corporation
Solution:
introduction of standard financial
ratios (return on investment and
return on equity) and flexible
budgeting.
Donaldson Brown (1885-
1965) CFO of General
Motors, who developed the
new financial instruments in
the 1920s
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The goal was set, but the technology was
missing
Mechanization
Automatization
The doctrine of Scientific Management in the 1960s gave birth to the idea of an
information system (MIS) with a common data bank where all the data of the
company could be stored. We had to wait for this vision to come true until the ERP
era.
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SAP- number one of the ERP-systems

SAP AG was founded in 1972. Their main
product was the R/2, a character-based
mainframe system that was based on tables.
SAP R/3 was a client server system, with
graphical user interface and a relational data
base. It was launched in the mid 1990 and
made SAP the ERP market leader.
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SAP Core Business Processes
This is the original SAP Diamand the way the modules and their
integration was pictured in the beginning. In the next slides youll find an
integration example taken from the SAP IDES system.
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Integration of sales and finance
The main integration points between Finance and Sales are the delivery
of goods and customer invoice.
Sales
Order
Sales and Material Management
Financial Accounting
Delivery Billing
Credit
Control
Quotation
SD
Payment
Acct.
Receivables
Credit
Control
Collection,
Interest
FI GL
Inventories

GL
Receivables
GL
Fin.assets
MM
Management
Accounting
CO
Profit Center
Accounting

Profitability
Accounting
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Business Case
Plant
1200 Dresden
CoCd 1000
IDES Germany
Sales Office
Paris
CoCd 2200
IDES France
Customer:
2500
Order 10 x PC
Order 10 x PC
Invoice 10 x PC
Payment 10 x PC
1
2
3
4
5
The Customer orders 10 PCs from the french sales office. The PCs will be
delivered from the Dresden plant in Germany.
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Sales Order
SD
CO
The sales order does not post
anything in the accounting, but the
profit center is defined at this point
and cannot be changed later. The
profit center comes from the
material master of the sold product.
The customer orders the PC:s
from the french sales office
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Delivery
The products are delivered from the
companys Dresden plant (an
intercompany transaction)
CO
FI
The Change of Stock and Cogs are
posted in the accounting of IDES
Germany
MM
Controlling Area:
1000 IDES Europe
Prcrt: 1500 PC Products
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ERP: real time integration
MM
Nimike: xx

Yht: 3200
FI
CO
Profit & Loss Balance Sheet
Capital
Costs
PCA

The transactions posted in
material management show up in
the Profit and Loss Statement
and in the Balance Sheet.
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Automatic account determination and
result / balance control
Goods in inventory
Balance Sheet
Financial Assets
Inventory
Assets

The goods are
consumed
The goods are sold
The goods are
purchased to a cost
object (e.g.cost
center)
Profit & Loss

Sales
Cost of Goods Sold
Margin
Result

Price Differences
As long as the goods stay in the
inventory, they are in the Balance
Sheet.
Posting goods movements usually
generate postings also in the profit
and loss accounts.
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Accounting documents of billing
IDES France sends an invoice to their customer and the sales revenue and the
receivable are posted in their accounting.
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Intercompany postings
CoCd 2200
Revenue: 1 000,00
Cogs: 0,00
Margin: 1 000,00
CoCd 1000
Revenuet: 0,00
Cogs: -800,00
Margin: -800,00
CoCd 2200
Revenue: 1 000,00
Int.Purchases: -900,00
Margin: 100,00
CoCd1000
Revenue: 0,00
Int Sales: 900,00
Cogs: -800,00
Margin: 100,00
Group revenue 1.000,00
The companies are not balanced. The french company gets all the revenues and the german company the
costs. This is why an intercompany billing is necessary.
CO FI
SD MM
Customer Order
Delivery from Dresden plant
Accounting Document

Billing
Accounting Document

Intercompany Billing
Accounting Document
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Settlement
Intercompany transactions
Plant
1200 Dresden
CoCd 1000
IDES Germany
Sales Office
Paris
CoCd 2200
IDES France
Customer:
2500
Order 10 x PC
Order 10 x PC
Invoice 10 x PC
Payment 10 x PC
1
2
3
4
5
6
CoCd 2200
Revenue: 1 000,00
Int. Purchase: -900,00
Margin: 100,00
CoCd 1000
Revenue: 0,00
Int. Sales: 900,00
Cogs: -800,00
Margin: 100,00
Group Sales 1.000,00
SAP is a financial system. It will prevent the posting
that crosses the company borders, unless you have
the necessary configurations in place.
Intercompany Sales & Purchase
5
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Pricing
Both the customer price and the intercompany price are maintained in the
SD the pricing conditions.
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Profitability Analysis (COPA)
During the billing run the data needed for profit margin reporting is collected in
the profitability analysis (COPA). From COPA the data is transferred to the BW
data warehouse of the IDES Group.
CO
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Profitability Analysis (COPA)
Besides billing data, COPA can get data
from the Cost Estimates of the products.
You can also add calculatory costs that will
only show up in the reports.
CO
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Accounting
The receivables are posted at the same time in the Accounts Receivable and in
General Ledger. The GL-account is in the the customer master data.
FI
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Drill down from accounting document
SAP is based on the document principle which means that a document is created
out of every business transaction in the system. The accountants and controllers can
from their own documents drill down to the original postings. The Relationship
browser (tx. ALO1) shows how the documents are related to each other (audit trail).
FI
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Accounting in ERP environment
In an integrated ERP system the accounting transactions are mostly created
outside accounting in the normal business operations and are automatically
updated in accounting. The real accountants work in the warehouses, sales,
purchasing and production.
As you can see in the IDES example, logistic guys dont use companies or
accounts in their postings. They use sales organizations, plants and materials. In
the system configurations these are mapped with the finance concepts.
How well these rules and mappings are made, determines the quality of the
accounting. Of course also the human choices have importance.
Subledgers as Cash Accounting, Accounts Payable and Receivable,
Asset Accounting are all integrated with General Ledger in real
time. They are automatically reconciled.

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Example of documents numbers in an industrial
company (make-to-order)
Over 9 millions
About 900.000
About 30.000
Under 3.000
Material Documents (goods issue, goods receipt, transfer
postings, inventory postetc)
Sales Documents
Purchase Documents
G/L Account Documents




Year:
As you can see, logististics produces over 9 million documents and accounting
only a few thousand.
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Integrated Business Model in Accounting
and Controlling (SAP)
CO-
PC





CO-
PA
CO-
OM
Standard Costs

Variances
Producton
Administration
Marketing
Sales
Business
Process
V
A
L
U
E

F
L
O
W
Production
Goods
Movement
Sales and Delivery
Procurement
PP SD MM MM
FI
Profitability
Analysis
This is how SAP presents the value flows. Postings from business prosesses flow through FI to CO, when
raw materials are procured, used in production, when goods are sold and delivered to customers.
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Pros of an ERP system
The transparency of the processes (good drill down functions)
Only one truth (right or wrong)
No longer corrections in accounting. The errors must be
corrected in the source systems were they were made
Common, shared master data
Real-time postings

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Cons of an ERP system
The errors are also very much integrated. Especially missing or faulty
master data is a common problem.

Integrated systems require more knowledge of the business processes
than traditional systems

With SAP the bookkeepers worst nightmare has come true. Everybody
acts as an accountant but the finance is still responsible for the results.

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Biggest risks for failure
Missing or faulty configurations
Incorrect mappings, errors in account determination
Master data
Wrong or missing data
Human factors:
Incompetence, misunderstandings, insufficient training
Going where the fence is lowest
Neglecting the continuity, new people are not trained
The implementation projects and changes are strenuous
Mistakes can be very costly and irreparable
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Reporting in SAP
Originally all the reporting was done in the operative system:
Standard reports, queries, Report Painter reports, drill down reports
The main problem was bad performance and very modest features
Custom-made abap-reports were very expensive

In 1997, the first version of SAP product for reporting, analysis and data warehousing (BW) was
launched.
It was not a hit in accounting and controlling departments: the users found it difficult, the
information was not real-time, it was not possible to drill down to the documents in ERP.

In 2007 SAP acquired Business Objects and integrated it with BW into NetWeaver Business
Intelligence Solution.

Currently SAP is investing heavily in BI-tools and solutions. SAP has abandoned many of their
own tools (SEM, PI) and bought replacing solutions.




Will SAP overcome its reputation as the
cemetery of data?
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SAP Business Intelligence
Dashboards
Targeted reports
Other
3
rd
Party
Sales
Interfaces
Credit
Control
Sales
Finance &
Projects
Self-service
Reporting





Business
Warehouse
(BW)
Business
Content
Data warehousing and business intelligence projects require very specific technical skills.
Additionally, also knowledge of business processes is necessary for understanding how business
intelligence technology can support the decision making process within the organization.
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Evolution of SAP Financials
Integration of SAP Core
Processes, the SAP Diamand
Satellites Business Intelligence
SAP Butterfly BI, EPM, GRC
How the SAP portfolio for Finance has evolved
SAP has resisted time and has succeeded in fulfilling the ever-growing demands of market. The
evolution from Diamand to Butterfly took 15 years.
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The metamorphosis of the SAP Butterfly
The Sap Butterfly has evolved to a whole range of new Business Analytics Solutions. The operational SAP Diamond is still in
the picture forming the core that takes care of the operational data. SAP has also opened up, and made it possible to integrate
non-SAP systems and data. It is very interesting to see, if SAP succeeds to beat the competition and will the finance people ever
give up on their current reporting tools and excels.
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Transition from ERP to EPM
The focus of the software vendors has moved from ERP to EPM (Enterprise Performance Management.
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SAP keeps the leading position
SAP is #1 for Finance and growing faster than competition in a growing market
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There is no end for the challengies

Complex Business Models Impact Finance
Complex company structures, global operations frustrate efficiency
Inherited financial systems add to complexity
Mixed IT environments slow cycles, impede process integrity
Extending the process outside the company can increase complexity
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New problem: we drowning in data
Never before in the history of mankind has it been possible to store such amounts
of data.
Because we dont have the right
tools and skills, we are aldo drowning
in excels.
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Big Data shortage of talents
Among the top Big Data challenges faced by todays CIOs is the current lack of skills to analyze the data.
A significant business analytics education gap has IT executives scouring the country to find people with the
data analytics skills they need now: workers with statistical and analytical skills as well as knowledge of
economics and the ability to understand causal relationships in the data.

The winners in the contest to woo top talent need to plan for the future. One approach to bridging the
current gap is cross-cultivation of business and technology skills: recruit business people and teach them
technology while putting technology-oriented people in the field to learn the business.

Todays CIOs understand that leveraging Big Data analysis for strategic advantage requires analytical talent as
well as technology infrastructure.
http://www.cio.com/documents/pdfs/ebook3-analytics-final.pdf
CIO Strategic Guide to Big Data Analysis: Coping with the Shortage Of Big Data Talent
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