future ready financials for manufacturers and distributors

Future Ready Financials ForManufacturers and Distributors

Run smarter and grow faster withManufacturing ERP for Accounting and Financials

Introduction.......................................................................................................

Accounting.........................................................................................................

Cost Accounting (Controlling).......................................................................

Cash Management............................................................................................

Reporting............................................................................................................

Other Considerations.......................................................................................

Conclusion.........................................................................................................

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Table of Contents

Immediacy is the distinguishing factor in 21st century ERP financial accounting. This hasn’t always been the case. Legacy ERP systems were frequently developed for accountants who needed to take a “snapshot” of the business at any time during the month and see the current position. But ageing ERP software didn’t take into account the needs of the shop floor where immediacy is key. Real-time information is crucial in the current competitive market where businesses move fast and product changes are frequent.

Nowhere is real-time accounting more important than with the costing of your products. Legacy accounting systems often embraced a “hands-off”, non-integrated approach to costing. Typically they had a month-end ‘roll-up’ process that gathered up all the data from production and retrospectively costed finished goods produced. There are two major problems with this approach:

l Much of what is made during the month is sold during that month, meaning the Cost of Goods Sold for those sales is based on the previous month’s inventory cost. If you use an average cost system, the costs are not typically updated retrospectively. Companies using this legacy type of month-end rollup typically ran on standard cost with subsequent journals to back out standard cost variations.

l You are working in the dark. In these days of rapid change and customer customization, you have no idea if your costing is correct until after the month-end roll-up. A real-time costing system allows you to check costing even while a production batch is in process. This helps mitigate risk, as you can change the Bill of Materials or specifications to resolve identified problems.

Introduction


There are four categories of accounting and finance management:

AccountingCost

AccountingCash

Management Reporting

Four Areas of Accounting and Financial Management


Let’s examine the separate needs and functional requirements of each.

Accounting:

Accounting is simply the recording of actual financial data so you can report on it.

The end-point or “gathering place” of your financial information is the General Ledger (GL). All of your financial reports are generated from the GL, as is the data that financial dashboards use to detail progress against your KPIs.

The structure of your GL Chart of Accounts (CoA) determines what and how you can do reporting so it suits your unique needs. Manufacturers generally need General Ledger account segmentation up to 10 segments or levels, to set up detailed charts of accounts that represent departments, divisions, regions, branches, cost centers, etc.


Segmented CoA’s also allow multilevel reporting so that your data can be grouped and viewed at all levels. If you need to access lower-level detail, you should be able to readily drill down all the way to the posting level detail directly from your report output. As the GL draws its data from all other modules, you can also create advanced reports with integrated business information across financials, accounting, inventory, sales, purchasing, and of course production.

Journals are the mechanism by which the GL is updated. Since the vast majority of the data is automatically posted to journals from other modules and functions, manual journal entry should be kept to an absolute minimum. However, a modern ERP system’s GL should provide many of the following features to make journal entry and posting simple, no matter which module they are generated from:

Modern ERP GL

Save multiple manual journal entries to a batch to verify and correct postings, if needed, before they are entered into the general ledger.

Journal Vouchers:

Define general ledger account templates to save time and help avoid mistakes during the manual posting of journal entries.

Posting Templates:

Identify postings for regular execution in accounting and specify a frequency for each recurring posting. The application should automatically send reminders for recurring transactions.

Recurring Postings:

Reverse month-end accruals automatically. By default, reversal of specified postings occurs on the first day of the next month.

Reversing Journals:

Define different distribution rules to characterize business activities and then allocate revenue or cost accounts to the corresponding distribution rule.

Distribution Rules:


Define different distribution rules to characterize business activities and then allocate revenue or cost accounts to the corresponding distribution rule. This is useful when you want to, for example, split the electricity bill across different departments to reflect their usage.

Cost Accounting (Controlling):

Accounting, in its purest form, allows reporting so you can see what happened. It does not tell you where you are right now. Cost accounting is the art of managing your business on a day-to-day, even minute-to-minute basis. GL reporting tells you how profitable you are. Cost accounting lets you manage the factors that determine your profitability.

One starting point for cost accounting is that you should be able to define and manage budgets against general ledger accounts. With a 21st century ERP, you should be able to configure budget allocation methods, define budget figures in any currency (local, foreign, or both), and display a summarized budget report that compares actual and planned figures. Online alerts are useful, notifying you if a transaction exceeds the monthly or annual budgeted limit.

Cost accounting affects every area of your business. Let’s take a look at each of these areas and determine which features are essential and which are “nice to have.”

Inventory: Inventory is where the greatest number of transactions are generated. Almost all other modules or functional areas affect inventory valuations in some way.

Optimization: Inventory management is firstly about optimization: having enough stock on hand to fulfill all manufacturing and sales needs, while eliminating over-stock and obsolete stock. In other words, optimization makes sure you have the least amount of capital tied up in inventory but with sufficient inventory to do your work. Inventory optimization is achieved through accurate forecasting, good Material Requirements Planning, and great production scheduling.

Modern manufacturing ERP that utilizes an in-memory database such as SAP’s HANA database, offers Intelligent Forecasting. Intelligent forecasting replaces manual forecasting by using built-in models based on statistical calculations that help predict trends and seasonal factors inside an organization. The result generated by the Intelligent Forecast can be used in MRP. You should also have also the ability to leverage what-if-analysis, by adjusting abnormal past transactions to obtain better predictions for the future.


Master Production Scheduling (MPS) can then tell you what you need to make based on the forecast and actual orders, and MRP will tell you what you need to purchase or manufacture to produce your final products.

Accurate costs: The second management area of inventory is about having accurate costs, no matter what costing method you use. An ERP system delivers this through real-time inventory updates from all transactions which affect inventory valuation.

A receipt posting will automatically create the necessary journal entry to adjust inventory levels and valuation as well as update corresponding expense accounts, if necessary. Any purchasing, sales, and inventory transactions should automatically trigger corresponding journal entries in real time without any additional manual entries or postings.

Real-World Example

Important features: The following are some of the inventory features that your chosen modern ERP system should have:

Bin management:

Control of where inventory is located within bins, within warehouses, within different warehouse locations. Bins should be restricted based on the unit of measure of items to be stored in that bin, e.g. higher bins may be for pallets only, small bins for loose items, etc.

Price lists:

Sophisticated ERP solutions have the ability to maintain price lists with tools to update them systematically. Price lists should be available at both purchasing and sales to maintain cost integrity. If a user manually overrides the assigned price list for an item, vendor or customer this action should trigger an approval process.

Valuation by serial number:

This ERP feature is critically important in a market that demands constant product customization to comply with customer specifications.

Costing methods:

Your ERP should support multiple costing methods, e.g. weighted average, standard cost, LIFO, FIFO and Batch cost for different types of inventory.

Important Features


Accounts Payable: Posts the debt when you purchase anything through Purchase Orders. Clears the debt and deducts from the bank account when purchases are paid for. It is recommended that all purchases, even for office supplies, etc. are recorded through purchase orders / accounts payable in order to keep better control and respect the use of control accounts. It also handles returns to vendors and subsequent debit notes.

Protected control accounts for business partners: You should be able to identify certain accounts as control accounts and assign them as default posting accounts for the increase or decrease to Business Partner (customer or vendor) balances. The ability to define multiple control accounts is useful if you are segmenting your business partners into different groups. Control accounts should not appear in the list of accounts available for a manual GL journal entry. This ensures synchronization between the general ledger and the subsidiary ledgers.

Accounts payable should also offer:

Three-way matching:

T W

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The AP clerk has the tools to match all three relevant documents – purchase order, goods receipt, and vendor invoice – to ensure there are no variations.

Workflow:

The AP clerk should receive a daily alert, notifying them of all invoices that require matching and approval. Workflows ensure the accuracy of the invoices before payment is processed.

Multiple currencies:

Accounts payable should support processing in multiple currencies as international purchasing is often made direct instead of through local agents.

Landed cost:

A “landed cost” feature allows you to manage charges from an international transaction involving customs and other import and export related expenditures.

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Accounts Receivable / Sales: Posts the debt owed to you when you ship products to your customers. Clears the debt and increases the bank account when your customers pay you. It also handles returns from customers and subsequent credit notes.

The functionality you should expect from 21st century ERP sales management and accounts receivable are:

Control accounts: as detailed above under accounts payable.

Quotations: Creation of sale quotations for your leads and customers. You should be able to calculate gross profit for each quotation and readily review the sales price history of the item. This initiates financial control before an order is accepted or the products made.

Order fulfilment: Ensures that back-orders are automatically filled when items are received into inventory, ensuring customer satisfaction while keeping revenue targets on track.

Workflow: It’s important to have a work-flow process to automate the many steps in the sales / accounts receivable process to ensure that nothing is missed and no revenue is lost.

Part-payment / Down payment: Ensure the recovery of balances due from partial payments and avert double billing when a deposit or down payment has been received.

Dunning: Automate the process of creating and sending reminder letters to customers with outstanding payments to maximize cash-flow.


Production Management: Production management posts all the changes in inventory value as raw materials are processed. It tracks the changes from Raw Materials to Work–in-Process (WIP) through to Finished Goods, to sales.

There are a number of costing models that manufacturers use, depending on local tax regimens and preference. The costing is driven by the Bill of Materials (BOM) and the costing structure that has been applied to it. Common costing models are:

Real World BOM Example

Skateboard1 Unit

Wheels4 Units

Board Axle Screws

RimTire Screws

1 Unit 2 Units 8 Units

1 Unit 1 Unit 4 Units

Sample Bill of Material (mBOM) for a Skateboard

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l Materials only: In this model, only materials are included in the BOM, and only the cost of those materials is assigned to the output of a production batch, and consequently to inventory costs when the batch is closed or part-closed.

l Direct costs: In this model, the BOM also has cost elements assigned to it which are included when the output is posted to inventory. These costs will include direct labor, utilities (electricity, gas, etc.) to drive machinery, consumables, factory floor area, etc. These costs are added to the material cost to update inventory and are only recovered when the finished items are sold.

l Full absorption costing: In this model, additional labor and overhead (burden) is attached to the BOM to cover all other costs of the business. These would include administration costs, sales and marketing costs, warehousing, including any costs of running the business that are not direct costs. All finished items are now updated to inventory with a cost that reflects the total cost of the operation. All expenses are offset against a recovery account which is cleared when the items are sold, i.e. no business expenses are deducted when they are met, but only as a cost of goods sold when the revenue is recognized for the sales of the item.

Production management should allow you to partially close a batch and recognize the impact on inventory immediately. It should also allow you to examine the actual costs incurred for the batch at any stage of production through multiple levels of BOMs.

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Cash Management:

Bank Book: Tracks all banking processes, from cash receipts and check writing to deposits, advance payments, credit card payments, account reconciliation, petty cash, and bank transfers.

Manufacturing ERP accounting software should be able to import electronic bank statements and automatically reconcile them. The reconciliation tool should also allow you to quickly reconcile incoming and outgoing payments with vendor and customer invoices.

The payment process should allow you to clear multiple accounts receivable and accounts payable invoices in batch mode for checks and bank transfers.

You should be able to match payments that are not automatically reconciled, such as payments made “on account,” to open items either automatically or manually through the reconciliation engine

Bank book functionality lets you optimize your liquidity by accurately forecasting your cash flow and cash requirements. It allows the efficient handling of payment terms, customer reminders, and cash collections, minimizing payment roadblocks.

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Reporting:

A wide range of financial reports should be available, such as balance sheets, profit and loss statements, profitability reports, multi-period comparisons, aging reports, and budget reports.

Financial dashboards are vital, giving you a visual display to monitor progress against your Key Performance Indicators (KPIs) across all areas of your business. Automated alerts provide timely insights if budgets or costs are being exceeded.

An in-memory database such as SAP Business One’s HANA will deliver immediate relevant data to the people who have a responsibility to control costs and revenue.

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Other considerations:

Three other functional areas which impact your financial data are:

l Fixed Assets: Manufacturing plants use machinery and other assets. An excellent Fixed Asset register is required to not only tracks asset valuations, re-valuations, and depreciation, but to also track maintenance costs against specific machinery to validate repair or replace decisions.

l Payroll: In manufacturing ERP, the payroll must be able to distinguish between direct and indirect labor, assigning expenses to the appropriate accounts depending on the production costing model used.

l Tax: Your tax engine should automatically calculate taxes, such as sales tax, value added tax, and withholding tax for each line item on each transaction taking into account country-specific allocation and reporting requirements. The automated computation and reporting of tax processes enables you to fully comply with legal requirements and eliminate the need for manual computations.

Conclusion:

21st century manufacturing ERP supports all aspects of accounting and financial data in real time, with no double posting that leads to errors. Streamline efficiency with immediate visibility into all areas of your business with easy access to the data you need to make informed decisions and run a more profitable manufacturing business.

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