Please check out our new Video Podcast on Value Driven Business Transformation and how Value Flow bridges the gap between operations and accounting in order to facilitate successful business transformations.
How to foster seamless business steering through harmonisation of operating models, value flows and management reporting.
Business transformation, in essence, focuses on fundamentally changing processes, systems, roles and technologies across the entire organisation. Such initiatives are founded on the hopes of achieving measurable improvements in efficiency, effectiveness and stakeholder satisfaction. Naturally, the decision to enact business transformation must be based on a sound understanding of the required changes, how to implement them, and what the implications are once they are implemented. It is imperative to take an embracing approach involving and ensuring alignment between all the stakeholders impacted.
Experience shows that this is rarely the case, with disjunct and misaligned efforts from the two worlds of Operations, and Finance & Controlling. Typically, accounting departments are left in the dark about business operations during process design phases of major transformation initiatives, while professionals from purchasing, production planning, and sales & distribution often seem not aware how their business operations impact accounting.
The far reaching consequences of misalignment between Operations and Finance & Controlling have been felt at all stages of major business transformation initiatives across many industries. Areas impacted range from process design and systems testing through to hyper-care and running the daily business. To demonstrate this, we present several examples from major business transformation projects, and show how things went wrong. They demonstrate how an apparently isolated problem can have impacts far beyond the radar of those responsible for implementing and championing the change.
Case 1: Misalignment between procurement, logistics, and accounting impacts system testing
Because involvement of local tax and finance departments into the project happened too late, the entire procurement process for certain materials had to be redesigned during testing phase. While making up for this, realignment across all related streams resulted in extra effort and the risk of delays in go-live dates.
Case 2: Misalignment between production, procurement, and accounting during process design phase impacts process execution during hypercare
The weighting step that is executed by a subcontractor was part of a recipe. During the process design, the production team only focused on processes relevant for core business. Therefore, the weighting process was not designed and consequently not configured in the ERP system. There was no account assignment. This problem was noticed during hypercare when the process had to be executed. As a result, no sales order could be created. Compounding the problem was the fact that there was no process concept. The whole life cycle of the process had to be adjusted within a productive environment.
Case 3: Misalignment between logistics, procurement, and accounting during process design phase impacts process execution during daily business
Assignment of logistic expenses to the right positions are critical from an accounting point of view. These involve cost of distributors. Incorrect valuation of cost of sales, cost of production, and time of sales recognition poses a compliance risk involving tax authorities. This can also have COPA impacts (COGS vs Production Costs), causing dissatisfactions of responsible executives in case of variable salaries. During a business transformation project, there was a lack of knowledge on two sides. Logistics was unaware about the fact that such regulation exists, and accounting unaware about different type of contracts SCM had with its business partners. This problem was noticed during daily business, i.e. after go-live and hypercare.
The way out
In our Business Flows reference model we demonstrate the real-live integration of business and accounting aspects of enterprise processes. We have compiled relevant content from decades of project experience and modeled these based on established standards. First started as an internal toolbox and training facilitator, our model has reached a maturity we are confident to share externally and that is valued by numerous subscription customers. Based on our industrial reference content and the profound insight of our partner SR Consulting Professionals in financial and management accounting and enterprise architectures, we have developed a concise and pragmatic methodology for representing both value adding activities and their finance & controlling impacts.
We are ready to help you implementing your transformation with a methodology that works. Consistently.
The solution approach
Value Driven Business Transformation ensures seamless process design and systems implementation through early alignment between operations and Finance & Controlling on key aspects of the business including financial steering, operating models, end to end scenarios and value flows. To accomplish this, we have developed an integrated approach that couples the separated views of operations and accounting. This integrated and aligned business transformation approach allows business steering through harmonization of operating models, value flows and management reporting.
Business strategy forms the basis for aligning the operating model with the business & financial steering model. At this early stage, stakeholder from both Operations & Finance & Controlling come together and detail the future enterprise set-up. Based on the defined E2E scenarios and processes, posting rules are derived for the allocation of value flows.
Process specifies the interaction of people and systems when executing business operations.
Value flow is the set (scope) of postings resulting from business operations
Posting rules are business requirements on how the system is to be configured in order to reflect the business & financial steering model in the context of a given enterprise structure
Business & Financial Steering model
An Integrated business transformation blueprint bridges the gap between finance, management reporting and operational streams during business transformation initiatives. In partnership with SR Consulting Professionals, we have a comprehensive consulting offering including domain expertise, proven consulting approach and dedicated methodology. In addition, our reference content Business Flows provides accelerators which help kick-start your initiative. Get in contact now for a personal presentation on details of our offering.
From Value Creation to Finance & Controlling - Aligning the separated views on your business
When talking to professionals from purchasing, production planning, and sales & distribution, they often seem not aware how their business operations impact accounting. By the same token, accounting departments are repeatedly left in the dark about business operations during process design phases of major transformation initiatives. This misalignment can be very costly, causing gaps from process design through to business rule definition, and Key Performance Indicator (KPI) interpretation.
Business processes are essential building blocks for organisational change and change can only be brought about when the stakeholders share a common goal; aligning on what needs to be done, how it is to be done, and what the implications are, once the work is done.
It is widely believed that thinking about business processes from an End to End (E2E) perspective fosters operational excellence since the key process flows, business rules, business roles and expected business outcomes are considered at all levels within the organisation. But Accounting too has its share of rules, legal requirements, roles, and expected outcomes, and often depend on input from upstream processes to ensure optimal service delivery. Keeping this in mind, one clearly sees the potential risks associated with a misalignment between business operations and accounting.
The solution approach
To foster holistic organisational transformation, it is essential that all business areas are in sync at the earliest stage of process design. The Value Flow approach facilitates the marriage between value creating processes and their Finance & Controlling requirements. This shall be demonstrated in the following examples.
1. Perform goods issue for sales from stock
Based on a customer order, goods are issued from stock, triggering a delivery to the customer. When this occurs, the relevant accounting entries are made namely, a posting to Cost of Goods Sold (COGS) and posting of the inventory reduction. The illustrated BPMN model below visualises this business transaction and the corresponding accounting impacts. In this model, the accounting postings are presented in a separate pool.
2. Create Customer Invoice
Once goods have been issued and a delivery is triggered, we expect the customer to be billed accordingly. The creation of a customer invoice will result in the recording of a receivable on the customer’s account, and the posting of the revenue which is derived from the business transaction as shown below.
3. Cross-company Business
Though the above presented examples may seem simplistic, Value Flow visualisation becomes more complex when considering business transactions among companies from one corporate group. A cross-company sales scenario typically involves a customer, the company selling to the customer (selling entity), and at least one other company belonging to the same corporate group as the seller (delivering entity). Showing the Value Flow for the transfer of ownership of goods, and the invoice creation can be equally challenging and enlightening when considering aspects of materials transfer, cross-company billing, commission agreements, and accounting requirements for balance sheet and P&L account consolidation. The illustrated BPMN model visualises the transfer of ownership of goods during a cross-company business transaction.
4. Product Costing
When calculating the product cost for manufactured goods, it is necessary to keep detailed track of all incurring direct and indirect costs. To do so, controlling functions must ensure that related costs are recorded and allocated accordingly within the relevant accounting period. Value Flow can be used to visualise the material and time consumption related to manufacturing processes. This provides useful information when aligning the policies and computation method for product costing. The BPMN model shows the accounting impacts when materials are used in the production process.
The way forward
Value Flow representation enriches process documentation by establishing cross references between key Value Flow topics within a business such as COGS and inventory postings, and the various instances and related E2E scenarios. These should be defined at the same point in time as process design with an early involvement of accounting departments. Value Flow therefore offers a framework to ensure alignment between Operations, and Financial and Managerial Accounting in business transformation initiatives.
In the next release of Business Flows, we will provide reference models with Value Flow representation for all core business processes. These can be used as a template to refine according to the scope and concepts of your business transformation initiative.
For inquiries on the concept and how to establish value flows in your environment please feel free to contact me.