Making the most of financial dimensions
One of the biggest advantages of deploying an integrated ERP system is to be able to analyze the business financials in near real time with full details. I sometimes resemble this to looking at a mirror in a foggy room. The mirror is your system. You are the business. The mirror is trying to reflect the business reality (your image) back to you. The less integrated your financials to operations, the more fog you have in your business. The more fog, the less visibility, thus the less corrective action. As you link your supply chain operations directly to financials with automated near real-time transactions, the fog starts to disappear. You start seeing yourself clearly, Now, you have a chance to correct the course and head to a better place.
In order to achieve this, your financials need to be able to track things at a granular level almost near real-time. In legacy systems, this generally results in the proliferation of accounts in your ledger. You want to track an expense by department, you create a new account. You want to track revenues by a product line, you create a new account. As a business grows and changes, your chart of accounts exponentially grows. That makes reporting difficult. You lose visibility and control.
Financial dimensions, sometimes referred to as account segmentation, help us with this challenge. Without introducing countless numbers of accounts to the general ledger, we can use financial dimensions to tag the transactions as they are posted to the general ledger. This achieves two things. First, it helps us control the size of the general ledger. Second, it gives us the details we need to analyze the business and take meaningful actions. Most businesses try to track both the revenue and the cost from the operational perspective. Therefore, financial dimensions are related to how the cost is incurred or how the revenue is generated. The most common financial dimensions are business unit, department, location, brand, product line, channel, and season.
Let’s work on an example. We can have a single revenue account for accounts receivable. We can then introduce financial dimensions of product line, channel, location. When a sales order for a jacket sold to a department store in the USA is invoiced, the accounts receivable account will be tagged with product line = tops, channel = wholesale, and location = USA. When a sales transaction for pants sold to a customer in a retail store in Europe is posted, the same accounts receivable account will be tagged with product line = bottoms, channel = retail and location = Europe. Now imagine thousands of transactions flowing through the system near real-time. At any given time, I can go to that one account receivable account and be able to report the revenue by product line, channel, and location. I should be able to drill down and see the original transaction that caused the financial posting. This is incredible visibility that is very powerful. The room is clear. The mirror is showing you every single detail in your business in real-time. You can clearly see your image and fix problems before they get out of hand.
You may wonder how this tagging process is happening in near real-time when humans are not involved. This is where the master data plays a big role. Each master data is linked to certain financial dimensions. Following the example given above, when you post a sales order, the system can get the product line from the product master, the channel from the customer master, and the location from the sales order. You can even put rules and defaulting mechanisms among these dimensions. For example, you may have a store dimension that only gets activated when you are recording transactions against the retail channel.
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My name is Cem and this has been another gem.
