It is Time to Abandon Old Financial Dimension KPIs

Analytics, ERP | Peter Tönnäng

It is Time to Abandon Old Financial Dimension KPIs

Modern analytics enables faster internal reporting separated from external reporting

Often during ERP implementations, we meet customers that want to measure their KPIs as they have always done, possibly even expand the number of financial dimensions to support even more measures. Modern IT infrastructure enables a more structured approach to measures. The financial accounting has the primary purpose to comply with legal requirements and help the accounting processes. The auditors should help to ensure compliance and the board of directors confirms the Income statement and Balance sheet.

The General Ledger and Operational measures 

But what about the Operations part of the business, do they need to look into accounting figures?

In a lean production environment of a manufacturing plant, important KPIs include throughput time, on-time-delivery, first pass test yield. None of them is possible to even attempt to measure through the General Ledger. A typical retail business would focus on Open-to-buy, shelf-shortage and forecast accuracy. Even though theoretically possible for the first of them, measuring from General Ledger data is far from optimal. Just as it is far from optimal to manually enter data into the General Ledger that originates from external calculation spreadsheets or similar. Just remember that any data that passes through the General Ledger do so at an additional cost, since all accounting rules and regulations apply. So, you might end up with both costly and distorted data.

Monetary measures vs. Non-monetary measures 

Since the General Ledger is intended for monetary values, no other units should be allowed. Several times I have encountered financial dimensions for Quantity, which the General Ledger is ill suited to handle. For a manufacturing company, the Cost of Goods Sold is often divided into portions like Direct Material, Direct Labour and Overhead. What happens when 100 pieces of such an item is sold, is that the Revenue account is credited 100 pieces and each of the Cost of Goods Sold account is debited 100 pieces, which for Direct Material + Direct Labour + Overhead sums up to 300 pieces. By looking only into the General Ledger, it looks like we shipped 100 pieces from the warehouse, invoiced 100 pieces, but took the cost for 300 pieces.

Why should the quantity at all have a separate financial dimension since it creates confusing information?

Remember that the General Ledger is designed for monetary values only!

Separation of External and Internal reporting

For a fast – or even on-line – feedback on KPI metrics, they should be published on a dashboard, preferably with trend curves from a materialized view or data warehouse. With such a fast performance feedback to Operations, there is no need to ask any financial controller to evaluate or self-assess the operations side of the business.

Since Operations then have all their measures and KPIs published on dashboards for all appropriate organisational levels, the accounting department can focus on the accounting required by legal or regulatory requirements. Cash Flow forecast, Assets & Project capitalization all fit in that context. Internal financial control might fit, but the effort to maintain a budget process with many Cost Centres might be more costly than beneficial. A CAPEX plan would probably suffice in a continuous Improvement mindset and would lower the internal effort considerably compared to a full-fledged budgeting process. Even though you might not want to adapt fully to the ‘beyond budgeting’ principles, you need to define the purpose and behaviour you want to achieve with the budgeting process.

Use the opportunity to improve efficiency

Whenever you setup a data warehouse, start an analytics project or upgrade your ERP or financial structure, make a self-assessment on which KPIs that belong to Operations and which belong to legal or regulatory requirements. Look at where the most undistorted data source can be found and feed the data warehouse with it. Perform a regular Extract-Transform-Load to relate data with attributes and publish dashboards with the best data possible, which in practice means that it should not be manipulated in a spreadsheet.

KPIs are important measures in any business and Accounting is a rather expensive cost not adding value to the operations side of the business. So please keep in mind to opt for a lean KPI measurement methodology the next time you start business system implementation or analytics project.

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