• Leveraging the power of HANA for allocations and profit calculations

Finext specializes in delivering the next generation in finance software and solutions, helping the office of the CFO to meet its goals. Part of that toolkit is SAP Profitability and Performance Management (PaPM).

We interviewed Alwin Dooijeweerd, Senior Business Analysist at Finext to discuss SAP PaPM, its role in financial organizations, 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, and you need good tools to do that”.

By Dennis Onstenk, June 2023

Versatile Cost & Profitability Calculations

PaPM is an extremely versatile program that fits into most types of cost and profitability calculations. For example:

  • Profitability calculations in multiple cost-accounting approaches
  • Plan and forecast modeling
  • Driver-based planning and modeling
  • Transfer pricing
  • Cash flow modeling
  • Liquidity forecasting
  • Carbon footprint and sustainability reporting

“It’s actually interesting if you look at how much you can use PaPM for. It works for profitability management, for tax calculations, and also for forecasting. You can do scenario analysis or calculations. And, that technology can run calculations that tell you not to sell a product anymore in a few seconds.” Alwin adds, “That can improve your revenue flow by speeding up the time-to-results on data analysis – so you no longer have to wait weeks or months for results – but can see in a few seconds if something is turning a profit. That’s very powerful”.

All Your Data Sources

SAP PaPM is native to HANA, meaning that it natively integrates to SAP databases and ERP. That’s ideal for S/4HANA users who have a large number of SAP databases to pull from, because PaPM can pull data, run calculations, and push data back to the source systems. But, you can also integrate third-party databases via API – pulling all of 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 those calculations and push them back to source, so the relevant people have that data”.

You’ll also want to choose output based on who’s using the data. PaPM can export data calculations to source or to other locations.

“You don’t want to have these kinds of calculations in your financial system because that has a specific purpose – you have to align the controllers who need the data with what data they are getting”.

High-volume Calculations

PaPM‘s primary strength is the high volume of calculations it can perform on your data.

“The USP is that you can pull all this data and then use different calculations or subjects to create different results, like forecasting, cost allocation, profitability allocation, or tax allocation. You can also use it to generate “what if” scenarios”.

Scenarios and Predictions

Previously, a business scenario would take a controller or strategic department days or even months to complete. As the world becomes more volatile, changes happen constantly, and being able to make calculations on the fly becomes increasingly important. PaPM gives you the tools to create cost scenarios and predict effects on your bottom line in seconds.

“So, as a business controller, you can have FT data available, and the calculation is always handled consistently. However, you could check a “what if” scenario by changing parameters like salary or region, then re-do the calculation, and within seconds you’ll have a new outcome”

“As an example, Finext is implementing PaPM at a company that buys ingredients to produce fries. They want to have scenarios to predict what will happen if prices for things like palm oil rise or fall. They need to know upfront what to do if that happens – e.g., should they use a substitute? And how will that affect the cost of the product. “

“Similarly, we wanted to calculate the impact of cutting diesel vehicles from a rental car fleet ahead of emissions schedules – and we used PaPM to predict those impacts.”

Tax calculations

“Companies should always handle tax calculations in a consistent way. Sophisticated tools like PaPM can do that. For example, PaPM enables cost-sharing. That can be especially useful for organizations struggling to get in line with the new Pillar 2 European Legislation – but is useful for everyone.

Making the Most of PaPM

Who sets up PaPM? Preferably, you work with a consultant to set up scenarios and formulas, because setup is the most crucial step. You need good and consistent formulas to generate good data. Of course, you’ll want to involve your own controllers and strategic analysts – but it’s crucial you leverage expertise to ensure these elements are set up correctly.

“Finance people always debate allocations, but that’s not the first step. First you need to know what information you want to present, then you have to capture relevant business parameters, setup a good formula, capture the data and then you can create insight and take steps to improve it. If you have a consistent way to calculate data – you have all the information you need 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 actual costs per product”.

“The last thing you want is a discussion about the validity of the numbers. You need to trust the data so you can discuss the impact of the numbers instead. If you have a good setup and a good formula as a baseline, that should be what happens. You should always be able to explain the outcome.”

PaPM at Finext

PaPM is a maturing product with over 6 years of history behind it. But, it’s not used in the Netherlands as much as in the U.S. and Germany.

“The U.S. is a lot 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 uses it for tax calculations. Still, PaPM is more and more popular in the Netherlands.”

Finext is currently working on its first Dutch implementation of PaPM with goals including:

  • Creating failure forecasts using detailed product data
  • Calculating detailed forecasts for the coming three years
  • Generating what-if scenarios

“We’re mapping things like potato production and costs, the price of oil, and other production data alongside energy, transportation, and employee costs to build a model that can help the client make decisions around products, customers, and contracts – including what-if scenarios to enable faster-decision making as the market changes”.

PaPM integrates everything into one place. As long as you set up the formula correctly, you can trust the data. There are always a lot of discussions about what data to use and there are always a lot of opinions, but it should be straightforward. Many organizations already use Excel for this – so you already have a formula, but PaPM always uses a standardized formula.

Finext can help you to align those formulas as part of setup. The idea is to get an allocation driver so that costs have consistency – where each time you calculate for a product, it’s based on the same data. Once that’s formalized, it’s not important anymore. The data you’re using and that’s available is important and then you can always know if the data is correct or not. And, that data will change, but the formula should always be standardized.

Alwin is part of the Finance Team at Finext, contributing expertise in tooling, processes, and profitability across the industry.

“We’re organized around customer profitability, and we advise our customers on profitability at a detailed level. That can mean databases, your finance data, allocations, insight, profitability per product. We have several years of experience in it and interest in the service is only growing – because many organizations have only used these tools for allocation. Switching focus to profitability on a product level means making a big shift. Many people have cost-per-product allocations set up in an Excel, but you need a more standardized tool and more consistent calculations”

Finext can advise your organization on cost and profitability, in collaboration with your S/4HANA, Oracle, or other software team. To learn more, get in touch.

SAP Profitability and Performance Management