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Former Member

Predicting Cash and COGS for CFO office – A case of over promise and under delivery?

“Revenues are market driven. Cost and cash are clear predictable. Still we can’t forecast a changed business scenario, develop an accurate COGS forecast, build a direct cash flow forecast, there goes the list which requires a detailed source to re-calculate a detailed result ; it remains a growing concern from CFO and had never been as painful as it is today”. We preferred to whisper this weakness over the years; I have seen hundreds of cases where we have managed this out, with heated debates within the finance groups. In most of these cases, amateurs were seen bullish to commit and fail, while more experienced professionals sell a safe story of “High level planning” as “best practice”. Either ways, we have kept COST and CASH predictions far away from the “detailed world” that they belong.

The CFO problem:-

For the CFO, Planned profitability drives expected share holder value for subsequent quarters within the year and beyond. CFO planning framework demands the simulation of this context for effective forward decisions in finance and its impact on operations. The capability to perform simple forecast, scenario planning, long term strategic planning and board level presentations require a simulation framework on Costing and direct Cash. Costs and cash and its demand for “more accuracy and detail” are here to stay. Do we have a solution for the “detail” it demands?

Critical components which deliver this capability to CFO office, is to build a predictive model for costs and cash, thus support predictions on cost to service or cost to produce, direct cash flow. While “Revenue” is addressed in most of the traditional products like Hyperion, Cognos, SAS and SAP, we have seen its weakness towards Cost and Cash. This limitation has always been a CFO demand with minimal results, thus our predictions fall short of detail in profitability, COGS, COSS and direct cash flows. Let me highlight the weakness and give an architecture which can resolve.

What are the key issues:-

The Key issues in mapping this CFO demand are:-

  1. 1. Inability to understand the complexity of Costing framework and its detailed data framework.
  2. 2. Inability of addressing line item detail with-in the business planning model.
  3. 3. Limitations of hierarchical master data and its changes
  4. 4. Performance issues in dealing with the detail
  5. 5. Real time integration for master data planning.
  6. 6. Inability to re-calculate the multi level valuations in planning products/service costs.
  7. 7. Incapability of hardware to buffer and work out detail for a huge data set.
  8. 8. Inability to plan raw material procurement, timing and pricing, which impact direct cash.

The solution:-

While planning applications available today have hardly resolved this core issue, our sub systems have evolved over time. Hardware has grown cheaper and software is innovating on cheaper hardware. This has given us the capability to build our solution, as extensions on a shared architecture of the enterprise eco systems. Here, planning system is the benefactor and not the solution by itself. I have given an integrated financial model below, which can work for large enterprises that are working on custom models to fix the above problem.

Given below is a demonstrated example for COGS and how the detail flows and recalculation calls back its source level detail, which can run into millions of records in actual customer scenario and deliver results with performance.

I have done further research to understand and compare this architecture and how it can work with Hyperion, Cognos, SAS, and Cloud offerings like Tide mark, ANAPLAN and other platforms.  The key issues I found in these conversations relate to the need for middle ware, which does not exist today. Let me do some further research on this middleware and I will be able to share more depth on how it can work with these products.

Let’s conclude on the story of “why detail matters?”

Meanwhile, let us not shy away from detail across the CFO architecture. Let us start delivering cost and cash simulation to enterprise level CFOs with Enterprise solution architecture, the way they need it and not the way that we were managing the past. We can fix all the eight issues addressed above and build it as extensions of existing CFO framework. I have demonstrated a COGS example - You will be able to deliver a seamless COGS integration at the level of materials, over heads, labor, BOM, Routes, activity, process, Production order, process orders, allocated expenses and related master data. Direct cash flow benefit from the raw material procurement plan at multi levels, material valuation at multi levels and thus cash from pricing and outflow from procurement, with timing.

Most vendors are busy with user experiences, GUI, IPads, IPods and the likes. They need to consider depth and functionality as fundamentals. SAP is the only company which has the breadth and depth to offer this solution for CFOs today. This should change with middle ware applications in the future. As of now, SAP CFO LOB delivers to this problem with clear road map. At an enterprise level, this solution will build on SAP FICO, TRM, SAP BW on HANA, and SAP BPC on HANA with SAP BOBJ. (SAP BW on HANA can hold SAP BPC in the same hardware as calculations are proposed in SAP BW on HANA).

CFOs will certainly be delighted and will appreciate the capability to simulate direct cash flow, COGS, SOP, and Cost to produce and cost to serve with accuracy, DETAIL, real time and build multiple scenarios for scenario planning and reporting to the board. Thus, our PNL get detail and so is our ability to simulate the detail of Costs and Cash.

(@samirneji, Research results from r-PPM)