Use the power of HANA for allocations and profit calculations

Finext specializes in delivering the new generation of financial solutions that enable CFOs to achieve their objectives. Part of these solutions is SAP Profitability and Performance Management (PaPM). We interviewed Alwin Dooijeweerd, Senior Business Analyst at Finext to discuss SAP PaPM, its role the finance department and how it fits into our portfolio. "Data is important, financial data is important, but using that data to make calculations for the business is the most important thing, and you need good solutions for that."

Versatile cost and profitability calculations

PaPM is an extremely versatile solution with multiple options to apply profitability calculations. For example:

  • Profitability calculations with cost allocations
  • Plan and forecast modeling
  • Driver-based planning and modeling
  • Transfer pricing
  • Cash flow modeling
  • Liquidity forecasts
  • Carbon footprint and sustainability reporting

"It's actually interesting when you look at what you can use PaPM for. It helps to calculate profitability, transfer pricing and also for forecasting. You can do scenario analysis or 'what-if' calculations. And that technology can do calculations within a few seconds that tell you that your a product is no longer profitable." Alwin adds, "That can improve your revenue stream by speeding up time-to-results in data analysis - so you no longer have to wait weeks or months for results - but can see within seconds whether something is profitable. That's very powerful".

"It's actually interesting if you look at how much you can use PaPM for.

Data Sources

SAP PaPM is a native solution for HANA, which means it can integrate directly with SAP databases and ERP. That's ideal for S/4HANA users who can draw from a large number of SAP databases to retrieve PaPM data from them, perform calculations and push data back to source systems. But you can also integrate third-party databases via API, merging all your data feeds into one system.

"PaPM functions separately from financial accounting because the purpose is different. Financial accounting, management accounting and strategic accounting are all different: they use the same data from the same sources, but the calculations are different and the frequency is different. With tools like PaPM, you can generate the outcomes and send them back to the source so that the relevant people have that data. You can also determine the output that way based on who is using the data."

"You don't want these kinds of calculations in your financial system, because that has a specific purpose - the controllers who need the data must be able to work from the same basis. This is where PaPM plays an important role."

High volume calculations

A key strength of PaPM is the rapid calculation of large amounts of data.

The USP is that you can collect all this data and then use different calculations or intersections to create different insights, such as forecasting, cost allocation, profitability allocation, or tax allocation. You can also use it to generate "what-if" scenarios.

Scenarios and forecasts

Previously, it would take a controller or strategy department colleague days or even months to complete a business scenario. As the world becomes more volatile, changes are occurring constantly, and it becomes increasingly important to be able to make on-the-fly calculations. PaPM offers you the tools to create cost scenarios within seconds and predict the effects on your business results.

"So as a business controller, you can have good outcomes and the calculation is always handled consistently. However, you can quickly adjust a 'what-if' scenario again by changing parameters such as salary or region, then re-run the calculation and within seconds you have a new outcome.""Finext, for example, is implementing PaPM at a company that buys ingredients for the production of French fries. They want to have scenarios to predict what will happen if prices for things like palm oil go up or down. They need to know in advance what to do if that happens - should they use a substitute, for example? And how that will affect the cost of the product. "

"Similarly, in relation to CO2 emissions, we wanted to calculate the impact of reducing diesel vehicles from a rental car fleet - and we used PaPM to predict that impact."

Tax calculations

"Companies should always handle tax calculations in a consistent manner. Advanced tools like PaPM can do that quite easily. That can be especially useful for organizations struggling to comply with the new European Pillar 2 legislation - but it's useful for everyone."

Get more out of PaPM

How do you develop an initial model in PaPM? Preferably, you work with a consultant to set up scenarios and formulas because this is the most crucial step. To generate good data, you need good and consistent formulas. Of course, you want to involve your own controllers and strategic analysts, but it is critical that you use expertise to ensure that these elements are set up correctly.

'Finance always discusses allocations, but that's not the first step. First you need to know what information you want to present, then you need to capture relevant business parameters, set up a good formula, capture the data, and then you can create insight and take steps to improve it. If you have a consistent way of calculating data - you have all the information needed to compare results over time - then you can use those insights to take action.

For example, you can look at overhead costs and create a formula to spread those costs across the products you sell and, based on that, better determine the actual cost per product." "The last thing you want is a discussion about the accuracy of the numbers. You have to trust the data so you can discuss the impact of the numbers. If you have a good setup and a good formula as a starting point, you should be fine. You always want to be able to explain the outcome."

PaPM @ Finext

PaPM is a mature product with more than 6 years of history. But in the Netherlands it is not yet used as much as in the US and Germany. "The US is much more interested in profitability per product," says Alwin, "Germany also just has a lot of SAP customers, and PaPM excels with SAP data feeds. And Germany it is mainly used for Tax calculations. Still, PaPM is becoming increasingly popular in the Netherlands."

Finext is currently working on the first Dutch implementation of PaPM with objectives including:

  • Making forecasts using detailed product data
  • Calculating detailed forecasts for the next three years.
  • Generating what-if scenarios.

"We are mapping things like potato production and costs, oil prices and other production data in addition to energy, transportation and personnel costs to build a model that can help customers make decisions about products, customers and contracts - including "what-if" scenarios. This enables faster decision-making in a rapidly changing market."

PaPM integrates everything in one place. As long as you work out the formula properly, you can trust the data. There are always many discussions about which data to use and there are always many opinions, but all in all it should be clear to everyone. Many organizations already use Excel for this purpose - so you already have a formula, but by using PaPM it becomes a standardized formula. Finext can help you align those formulas as part of the setup. The idea is to get a logsheet through so that the results are consistent: every time you calculate a product margin, it is based on the same data.

The data that you use and that is available is important, and then you can always know whether the data is correct or not. And that data will change, but the formula should always be standardized.

Alwin is part of Finext's Cost & Profitability team and brings expertise in tooling, processes and profitability across the industry. "We are organized around client profitability and we advise our clients on profitability at a detailed level. That can be databases, your financial data, allocations, insight, profitability by product. We have had experience with it for several years and interest in the service is only growing - because many organizations have used these tools only for allocations. Shifting the focus to profitability at e.g. customer level means making a big shift. Many people have set up cost allocation by product in Excel, but you get more out of a standardized tool and more consistent calculations."

Finext can advise your organization on cost and profitability, working with your S/4HANA, Oracle or other software teams. Please contact us for more information.