Analyzing Profitability Management Objects

Profitability segments are the market segments or strategic business units that you can analyze in Profitability Analysis (CO-PA). These segments represent combinations of product, customer, and sales structure information. They contain information on company codes, business units, and profit centers.

The primary purpose of CO-PA is to enable reporting on margins and other profitability figures along marketing lines as defined by profitability segments. CO-PA is designed to produce profit and loss statements under the cost-of-sales accounting format and philosophy.

Profit centers are the areas of responsibility within a company. Profit centers are responsible for revenues and expenses, and include the positioning of investment centers as well as certain assets and capital. All profit centers are arranged into a standard hierarchy that represents the entire company.

The primary purpose of classic Profit Center Accounting (EC-PCA) is to enable reporting on performance information along organizational lines, as defined by the profit center hierarchy. EC-PCA in the New General Ledger is designed to produce profit and loss statements under the period-accounting format and philosophy. Note that the cost-of-sales accounting in EC-PCA can also be undertaken with the help of functional areas.

The operating concern is the key organizational unit in CO-PA. It defines the extent of the combination of marketing and sales information reported in CO-PA. When organizational structures are defined, several controlling areas are assigned to one operating concern. For the sake of simplicity and convenience, if all controlling areas and company codes share the same fiscal calendar, then companies have a single operating concern.

The controlling area is an organizational unit that defines the independent cost accounting operations of the company, such as cost center accounting, profit center accounting, and order accounting. When organizational structures are defined, company codes are assigned to controlling areas.

Note that you can assign several company codes to a controlling area to enable cross-company cost allocations. This does not take into account value added tax.

The company code is an independent accounting unit within a client. At the company code level, the legal requirements of a balance sheet or a profit and loss statement are fulfilled. Plants are assigned to company codes when you define organizational structures.

The plant represents a production center. It is the primary organizational unit in operations and manufacturing.

In costing-based CO-PA, all amounts are stored in an operating concern currency. This is specified in the operating concern attributes.

Configure the attributes to store values in the local currency as well. This option has the effect of doubling the stored transaction data.

Margin Analysis stores all transactions in the following currencies:

• Transaction currency

• Local currency

• Controlling area currency

EC-PCA stores transactions in the transaction currency, local currency, and a special EC-PCA currency. It is recommended to use EC-PCA in the New General Ledger. Financial Accounting data are stored in transaction currency, company code currency, and, if required, parallel company currencies like an index-based currency.

Get an overview of the organizational assignment for your operating concern using the Customizing Monitor.

The Customizing Monitor shows an overview of the organizational structure and its assignments, which are as follows:

• The controlling areas and the company codes that are assigned to plants and sales organizations
• The basic settings for the operating concern

By using the Customizing Monitor, you can analyze the organizational assignments of the operating concern.

Decision-makers in a company need different types of information.

For the individual company codes, profitability data must be shown from the perspective of each company code and must match the income statement.

For the group head office, the most important view is the group as a whole. As a way to eliminate intercompany profits, the basis for decision-making requires that the group be represented as a business unit.

For profit centers, profit center managers require equivalent information. In such cases, sales between profit centers within a company are also part of the profit analysis.

Different Views in CO-PA

CO-PA must provide the appropriate information to your company to form the correct basis for decision-making.

The individuals responsible for a group must obtain the group result through the company results of the legally-independent units. These company results should also allow profit center managers to arrive at a profit center result. This means that they should be able to perform CO-PA using transfer prices.

Parallel Evaluation in CO-PA

Sales revenues can be transferred between profit centers in CO-PA as internal revenues.

When you customize CO-PA, decide if you want to post additionally with profit center valuation in CO-PA.

You can also transfer the result of the actual costing material ledger to CO-PA. To do so, map the cost component structure of the material ledger elements to the value fields that you have created for that view in your operating concern.

The figure, Summary: Profitability Management Types, shows the different aspects of profitability management from the management point of view.

Profitability Management for Operations

The figure, Summary: Profitability Management for Operations, shows the different aspects of profitability management from the operations point of view.

Since SAP S/4HANA release 1809, predictive accounting is available in Financial Accounting. The usage of a prediction ledger and the impact to Margin Analysis will be discussed in unit 4.

Finance is always focusing on running the business, executing operational tasks. But nowadays this is not what is expected from the business anymore. Business expects finance to deliver the necessary insights for decision making. In order to free up time, operational tasks cannot just be abandoned of course. They need to be executed. But the purpose is to automate (through ML, the use of networks, decide which key tasks to perform by starting by looking at relevant KPI’s and go from there). It’s not about reducing the headcounts but getting rid of the boring jobs while shaping them into new innovative and valuable roles.

In organizations which have moved (partially) towards the automation of operational tasks and increased focus on insights, we usually see insights that focus on the past. In other words, we report on actuals. While this is interesting, it doesn't shed light on the future. We cannot change the past, so forward-looking insights may be more useful.

In order to focus more on forward-looking insights, and make them actionable, classic reporting activities will become more efficient (like operational processes). This is where advanced analytics comes in (including predictive analytic capabilities, smart alerting, increased flexibility in reporting using embedded reporting capabilities within SAP S/4HANA, and so on).

In SAP S/4HANA, development efforts for profitability analysis only target Margin Analysis. There are no efforts to enhance costing-based CO-PA. Margin Analysis is perfectly integrated into the overall concept of the Universal Journal and fully conforms with our Financial Accounting development strategy. Margin Analysis has been extended broadly over the past releases and we continue to conduct new developments in this area only, resulting in a superior solution designed to handle the needs of modern businesses. We see new customer installations choosing Margin Analysis only, and an increasing number of replacements of costing-based CO-PA with Margin Analysis.

• Holistic and consistent financial information without reconciliation: The Universal Journal combines financial and managerial accounting and directly records all dimensions including custom fields. Margin Analysis provides consistent financial information without any reconciliation needs along with a financial audit trail. All innovations developed for the Universal Journal are immediately available within Margin Analysis. A consistent approach ensures common usage of ledgers, currencies, valuations, predictions, and simulations, as well as their availability in planning and reporting.

• Real-time visibility into margins: All revenue and cost of goods sold postings are automatically assigned to the relevant dimensions at the time of posting. Also in further scenarios, such as project sales, the new approach assigns profitability dimensions immediately. Together with real-time processing of former period-end procedures, this approach provides real-time visibility into margins during the period.

• Embedded analytics: Through SAP S/4HANA embedded analytics dedicated operational reports for multi-dimensional Margin Analysis but also regular G/L reports, such as P&L by market segments, make use of all profitability dimensions and allow for a drill-down to line item details without data manipulation or data transfer to analytical applications.

The logical start point is the financial steering model which is the central part of the SAP S/4HANA solution: the so-called Universal Journal. This contains all individual transactions which take place, and for each transaction keeps track of all relevant business dimensions including not only financial dimensions like profit center and cost center, but customer, product or service, industry, region and so on.

Based on this, any type of aggregation can easily be done to deliver the correct profitability insights. Until the 1709 release, there were specific situations for which full-blown profitability analysis could not be done straight on this universal journal.

Specific use cases were causing the need to move into the direction of a stand-alone profitability analysis setup, based on the costing-based COPA architecture which we know from the ECC world. Surely, all information could already be delivered in this way, but with two major drawbacks:

• Again, we are faced with the need to reconcile the margin reporting with the overall financial information.

• Reporting could not be completed in real-time.

Margin analysis is fully integrated in the Universal Journal. Therefore, it’s reconciled by design. The internal and external views in accounting are harmonized and allow comprehensive reporting with DRILLDOWN functionality in P&L statements and balance sheets. The objective for the future is to completely separate margin analysis and costing-based profitability analysis and to deliver a margin analysis without operating concern based on the field catalog of the Universal Journal.

The following figure gives an example of the standard report in Margin Analysis. It is possible to report in all ledger following a contribution margin scheme.

Analyze contribution margins for individual products.

With this app, you can analyze contribution margins for individual products along related product information and available profitability characteristics. It allows you to drill down on fixed and variable costs based on your standard cost component split. Furthermore, you can report the billed quantity as well as the margin per unit.

Line items will only be included in the calculation if the journal entry is assigned to a profitability segment and the Product Sold field is filled. Values will be displayed in the global currency. Alternatively, you also have the option of displaying values in the company code currency for the selected measures.

Currently, Account-based COPA is available On-Premise. Margin Analysis On-Premise is under construction.

The following figure gives an overview of the planned next steps in the development of margin analysis. The goal is to enhance Margin Analysis with all functions, that are available in CO-PA costing based and more. The time frame for Short-term is about 1 year, for mid-term 2 years and for long-term about 2-3 years beginning in the year 2021.

At the time the course material was created, the new features of Margin Analysis for SAP S / 4HANA 2020 have not yet been released. we therefore recommend that you take a look at help.sap.com. Keyword: What's new.

• Margin Analysis focuses on delivering insights for decision-making.
• SAP S/4HANA Margin Analysis integrates with the Universal Journal for real-time reporting.
• Operating concern defines the extent of marketing and sales information in CO-PA.
• Profitability segments combine product, customer, and sales structure information.
• Parallel currencies are stored in transaction, local, and controlling area currencies.